If you’re thinking of taking out a mortgage or remortgaging, it’s important to understand what Loan to Value (LTV) is. LTV is a measure of how much money you are borrowing against the value of your property. It’s expressed as a percentage and is used by lenders to assess how risky a loan is for them. The lower the LTV, the less risky it is for the lender, so they may be more likely to offer you a better interest rate. In this quick guide, we’ll explain what LTV is and show you how to work out your own LTV ratio.
What is Loan to Value?
(LTV) – Loan to Value, or LTV for short, is the percentage of your mortgage which is lent against the value of your property. For example, if you take out a £100,000 mortgage and your house is worth £200,000 then your LTV would be 50%.
The higher the loan to value the higher risk to the lender, this is because there is more risk that they won’t get all their money back if they have to sell the property.
How do you work out an LTV ratio?
To work out your own Loan to Value (LTV), simply divide your mortgage by the value of your property. So in our previous example, £100,000 divided by £200,000 equals 0.50 or 50%.
You can use our remortgage calculator to get a rough idea of the value of your home or you can also check Zoopla.
You will need to understand loan to value for almost any type of mortgage including for:
- First time buyer mortgages
- Home mover mortgages
- Remortgages and product transfers
- Buy to let Mortgages
Why is Loan to Value so important?
When it comes to taking out a mortgage or remortgaging, one of the most important things that lenders look at is your Loan to Value (LTV). This is because the lower your LTV, the less risky it is for them.
This means that you may be able to get a better interest rate on your mortgage, as well as other benefits such as free valuations and cashback.
If you are looking for a bad credit mortgage then you may need a bigger deposit as lenders that accept bad credit usually want more security to reduce the risk.
What is a good LTV? – It’s difficult to say what a ‘good’ LTV ratio would be as this will vary depending on your individual circumstances. However, most lenders prefer an LTV of 75% or below in order to start being able to obtain some of the best rates.
How can I improve my loan to value? – There are various ways in which you can improve your Loan to Value (LTV) ratio.
One way is by increasing the value of your property by doing home improvements or by buying in a more desirable area.
You could also try and reduce the size of your mortgage by increasing your deposit or making over repayments.
Generally, a rise in house prices will also decrease your loan to value.
How does LTV affect my mortgage?
Your Loan to Value (LTV) ratio will have a big impact on the type of mortgage that you are able to obtain.
If you have a high LTV then lenders will have a higher credit score requirement. With 95% LTV mortgages sometimes you may not pass the lenders scorecard even if you have reasonably good credit which its why its important to check your credit report and speak to a mortgage broker even if you have already been turned down by your own bank as we may still be able to help, 95% LTV Mortgages (5%Deposit mortgages) and 90% LTV mortgages (10% deposit mortgages) are generally considered high risk by lenders, this means that lenders may restrict their maximum lending and also apply higher interest rates.
Conversely, if you have a low LTV then you may be able to access some of the best mortgage deals on the market and borrow more.
How does LTV work with a remortgage?
When it comes to remortgaging, your Loan to Value (LTV) ratio will be one of the most important factors that lenders take into consideration.
This is because it will affect the interest rates that you have access to, this can be especially important if you started off on a high loan to value as typically the interest rate would’ve started off higher so what the loan to value is at the time of remortgage will determine if you can access lower-rate products.
Generally, if you have a high LTV then you may find it difficult to remortgage unless you are looking for a like for like remortgage, this means you are not looking to borrow anymore as many lenders will only offer products with a maximum LTV of 90% when capital raising. However, if you have a low LTV then you may be able to get a deal with a low-interest rate and capital raise for things such as home improvements or buying an investment property.
Remember, it’s always important to speak to a mortgage advisor who will be able to find the best deal for you based on your individual circumstances, we will know all about the different loan to value bands and whether or not its worth over repaying to achieve a lower LTV.
Momentum Mortgages are mortgage brokers based in Sevenoaks, Kent. We help people to buy, invest or remortgage property while reducing stress and saving time. We have helped clients all over Kent including Tunbridge Wells, Tonbridge, Maidstone, Swanley, Dartford, Bromley, Orpington and more.