Loan-to-Value (LTV) – Understanding Loan-to-Value & How it Works
What is Loan-to-Value (LTV)?
Expressed as a percentage, Loan-to-Value (LTV) refers to the ratio between the value of the loan you take out and the value of the property as a whole. It is the portion of the property’s value that isn’t covered by your deposit.
As of June 2023, the average house price in England was £306,000 (source: Office of National Statistics). Even with a lot of saving involved, it would take an extremely long time for most people to be able to raise the funds to buy a house outright. Therefore, the vast majority of people have to borrow, i.e. a mortgage, in order to buy a property.
To calculate LTV, divide the amount you need to borrow by the total value of the property and multiply the result by 100.
Value of the property – Deposit = Amount you need to borrow
Amount you need to borrow/Total value of the property = LTV
LTV x 100 = LTV percentage
For example, if you want to buy a property worth £200,000 and you have a deposit of £40,000, you will need a loan of £160,000 in order to buy the property. Your LTV will thus be 80%.
200,000 – 40,000 = 160,000
160,000/200,000 = 0.8
0.8 x 100 = 80
Importance of Loan-to-Value Ratio
Lenders use LTV ratios to determine how much of a risk you are to them. The higher the LTV, the higher the potential loss the lender will face if you (the borrower) fails to repay the loan.
LTV is pivotal in determining whether you can get a mortgage, and if so, what type of mortgage. As well as other factors like your income, credit score and stability, lenders will look closely at the potential LTV of the property you are proposing to purchase.
What is a Good Loan-to-Value?
Generally, the lower the LTV, the better – a loan with a lower LTV presents less of a risk for the lender as the borrower is borrowing less. An LTV ratio of 80% or less is usually considered ideal by most lenders.
Those with a higher LTV can still get a mortgage, although they tend to be offered deals with higher interest rates.
What is the Maximum Loan-to-Value?
90% and 95% LTV mortgage deals can be offered to people who only have a small deposit of 10% or 5% respectively. However, the rates offered are likely to be higher compared to those who are able to put down a larger deposit.
If you are saving up for a deposit for a property but have marginally less than required to reach a particular LTV threshold, you may want to consider saving for a little longer. By increasing the size of your deposit and reducing your LTV, you are more likely to qualify for a better value loan, which in turn will save you thousands of pounds in the long run.
Covid-19 & its Impact on High Loan-to-Value Mortgages
Coronavirus has impacted every industry in the UK and the housing market is no exception. Many of the UK’s biggest banks and lenders are continuing to refrain from offering high LTV mortgages. Barclays, Halifax and Santander, to name just a few examples, are all holding back from lending to those looking for 90% and 95% LTV mortgages. Only those with larger deposits are getting their applications accepted.
However, if you are looking for a high LTV mortgage deal, all is not lost; there are still options available to you. It’s advised that anyone requiring a high LTV mortgage gets in touch with an experienced mortgage broker, like The Mortgage Heroes, for professional help. With access to the whole of the mortgage market and specially negotiated rates through our network Quilter Financial Planning Limited, we have the best chance of getting you the right mortgage.
High Loan-to Value Mortgages with The Mortgage Heroes
Here at The Mortgage Heroes we specialise in helping people in all situations find the right mortgage. Whether you’re looking for a high or low LTV mortgage, we have the solution for you.
We keep you up to date throughout the whole process and follow a no mortgage, no fee promise with our clients.
For reliable and trusted help please don’t hesitate to get in touch with a member of our team today.