When shopping for a mortgage, especially if it is your first, the terminology, the numbers and the cost can be confusing. There is a lot to take in.

One particular aspect of mortgages we are often asked about is the LTV. People want to know what it means, how it’s worked out, what kind of LTV is considered good, and much more.

In the blog, we dive in and unpack what LTV is all about so your questions can be answered.

What is loan to value?

Loan to value, or LTV as it’s often referred to, is the term given to the ratio of the loan to the asset. In the case of property, the loan is the mortgage, and the asset is the house.

The loan-to-value (LTV) indicates how much of a property’s value is being borrowed and what portion is already being covered by a deposit or other funds.

As an example, 75% LTV would mean you are borrowing 75% of the property value via a mortgage or other loan. The remaining 25% is then being funded by other capital you have access to.

How do you figure out loan to value?

It’s simple! Just take the mortgage amount and divide it by the value of the property, multiplying it by 100 to convert it to a percentage.

For example, let’s say you are looking to buy a £300,000 property and you require a £250,000 mortgage. Your LTV would be 83%.

£250,000/£300,000 * 100 = 83%.

What is a good loan to value ratio?

Ideally, you want your loan to value to be as low as possible. The lower the LTV, the better the interest rates will be and the more equity you instantly hold in the property.

Anything below 60% is often seen as very good, and an area where you are more likely to find better rates and a higher chance of securing a mortgage. That being said, anything under 80% is widely seen as the standard for a good LTV.

Should your LTV be hitting 85% or more, the rates will be much higher, and you could even find the pool of lenders greatly reduced.

How can you improve your loan to value ratio?

Improving your LTV is certainly possible. It might take a little work, but the end result is potentially a huge saving as you’ll have less debt to worry about.

You can do this by:

• Trying to negotiate with the seller so you get the property for a lower price
• Saving a larger deposit
• Making mortgage overpayments that don’t incur an ERC
• Making home improvements that drive up the value of your current home

How do I work out LTV when I remortgage?

The basis of working out the LTV when you remortgage is still the same, but there is a slight difference. Compared to when you purchased your property, the value is likely to have risen. Your remortgage will need to reflect this new value.

However, you’ve now got equity in a property where last time round you didn’t. Therefore, this time, look at what you owe on your current mortgage. Divide that by the new value of your home and multiply by 100.

The larger the equity, the smaller the LTV, and therefore the less you need to borrow.

How does loan to value affect my mortgage?

It affects it a great deal. As touched upon earlier, the higher the LTV, the more you’ll need to borrow to pay for your home. The more you need to borrow, the greater the risk is for the lender. The higher the risk for the lender, the higher the rates of interest they charge.

You’ll find that once your LTV hits 80% or more, you’ll be at the higher end of the interest rate spectrum. Rates will drop when you have anything under 80% LTV and get even better once you can secure an LTV of 60% or below.

Interestingly, going from 60% down to 40% or even 50% doesn’t make much difference in the interest rates you pay.

What LTV should first time buyers aim for?

For first-time buyers, the housing market can be a tough place. With no equity in place and potentially only a small deposit saved, it’s not easy to secure a decent LTV. In many cases, it’s only going to be possible to get an LTV of 80% or more. However, speaking to first time buyer mortgage brokers can help you find a suitable and more affordable mortgage.

Over time, as the mortgage gets paid off, the LTV will improve and give first-time buyers a chance to move onto more favorable rates, benefitting from the increase in equity and home value.

How will my loan to value be affected by changing house prices?

There can be a significant impact, and much depends on whether house prices are rising or falling.

If prices are rising

If house prices are rising, you stand to see your LTV increase, sometimes substantially.

For example:

• You buy a house valued at £200,000 and have a £40,000 deposit
• A mortgage covers the remaining £160,000, giving you an 80% LTV
• You pay off £30,000 of the mortgage over the next few years
• This leaves a mortgage balance of £130,000
• Your property is now valued at £300,000
• Your LTV now becomes 43%, meaning you own 57% of the property and not 20%

If prices are falling

Should house prices be going the other way, you could find yourself owing more than what the property is worth.

For example:

• The home you buy is worth £250,000
• You have a deposit of £50,000
• This leaves a mortgage of £200,000 and an LTV of 80%
• Your home has dropped in value to £150,000
• You now owe the lender £50,000 more than the home is worth

Mortgages can be complicated, and having a clear idea of the costs and risks can be difficult. That is why we exist. As expert mortgage brokers, we offer impartial advice and guidance to those looking for the best possible mortgage deals. Contact our experienced team today to see how we can help.