How Loan to Value (LTV) Ratio Affects Your Mortgage

August 1, 2020
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Those applying for a mortgage for the first time will soon discover the abbreviation LTV. This stands for loan to value, and it is a calculation of the lending risk to financial institutions. When an individual applies for a mortgage, they will be asked to provide a deposit. This means that they won’t be applying to borrow the full value of the property, but instead, they are applying to borrow a percentage of the value of the property.

What is the LTV ratio and why is it important to lenders?

This percentage is known as the loan to value, or LTV, and it is used by lenders to determine the amount of risk and therefore the interest rate. A borrower with a higher risk factor will be subject to a higher interest rate. Loans with a higher level of risk are always subject to higher interest rates.

If you were unable to keep up with your mortgage payments and your home lost value, the bank may not be able to recoup the entire amount borrowed. This is what we mean when we talk about risk.

Lenders will look at the LTV requested as part of their affordability checks. During times of market uncertainty, lenders are less likely to grant high risk, high LTV loans. So if you’re thinking about getting on the property ladder while there is a slump in the housing market, you may need to save a larger deposit to be accepted.

When the market is booming, lenders are more likely to be generous with their loan approvals, so a higher LTV might not be an issue. In this situation, you can still expect to pay higher rates for your mortgage product, as the bank will still be taking on a high-risk loan.

Is higher or lower LTV better?

A high LTV means that you are borrowing a high percentage of the property value. This means you have a small deposit, and that the risk to the lender is higher. This type of loan would be subject to high-interest rates.

A low LTV means that you are borrowing a low percentage of the property value because you have a large deposit. This would be lower risk to the lender and you should, therefore, have access to the best interest rates.

LTV In Practice

Imagine you are purchasing a £200,000 home. Offering a deposit of £10,000 would mean applying for an LTV of 95%. This could be considered high, and therefore subject to high-interest rates.

With a deposit of £40,000, this could mean applying for an LTV of 80%. This would be considered low, and you would, therefore, be able to access the best rates.

While you would pay a larger deposit upfront, you would be able to access lower interest rates which would lower your monthly payments, allow you to pay it off soon, and reduce the overall amount that you have to repay. This is why it is considered a good thing to apply for a low LTV.

What is the maximum LTV on a mortgage?

The maximum LTV many lenders will allow is 95%. In the past, it was possible to get a 100% LTV mortgage. This would mean that no deposit is required and the bank would take on 100% of the risk. These have been largely phased out since the 2008 financial crash.

The 100% mortgage might still be available if you can ask a family member to offer their property as security against the loan. This means that if you fail to make your mortgage payments, the lender would be able to seize your guarantor’s home to make up any shortfall.

Most lenders will only offer 95% LTV, which means you will need to provide a minimum of 5% of the value of the home. There are options to boost your deposit, including a "help to buy" loan which would increase your 5% deposit to 20%. You would take out a loan for the remaining 15% and pay this back alongside your mortgage payments.

How can I lower my LTV?

There are two main ways you can lower your LTV to access better mortgage rates.

  • The first option is to save more money so that you can offer a bigger deposit. For example, if you are purchasing a £95,000 property, you would need £4,750 for a 95% LTV and £9,500 for a 90% LTV. Boosting your deposit savings through a "help to buy" scheme is one way that you could increase your deposit and lower your LTV.
  • The second option is to purchase a less expensive home in the beginning. For example, a £10,000 deposit would only be a 5% deposit for a £200,000 home, but it would be a 10% deposit for a £100,000 property. Purchasing and renovating a less expensive home and then moving to a larger property when you have increased your equity

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