What Does Loan to Value (LTV) Mean?
When you’re looking at the world of mortgages, it’s easy to feel overwhelmed by the jargon and technical terms thrown your way.
One of the most important concepts you’ll likely encounter is Loan to Value, often abbreviated as LTV.
Understanding LTV is important, as it directly affects the size of your mortgage, the interest rate you’ll pay, and the types of mortgage deals available to you.
At Kerr & Watson, we specialise in providing clear, expert mortgage advice, guiding you through each step of the process.
Here we explain what LTV means, how it’s calculated, and why it’s so important when buying a home or remortgaging.
What is Loan to Value (LTV)?
Loan to Value, or LTV, is a ratio that compares the size of your mortgage to the value of the property you’re buying or refinancing.
It’s expressed as a percentage and is used by lenders to assess the risk of lending to you. The higher the LTV, the more risk the lender perceives, as you’re borrowing more relative to the property’s value.
For instance, if you buy a property worth £300,000 and take out a mortgage of £240,000, your LTV is 80%.
This means you’re borrowing 80% of the property’s value and have a 20% deposit.
How is LTV Calculated?
Calculating your LTV is straightforward. You simply divide the amount of the mortgage by the value of the property and multiply the result by 100 to get a percentage.
Example:
- Property Value: £250,000
- Mortgage Amount: £200,000
Formula: £200,000 / £250,000 = 0.80 x 100 = 80%
This calculation is important when you’re applying for a mortgage or remortgaging because it helps determine the mortgage deals available to you.
Find out Your Options
Why is LTV Important?
LTV plays a significant role in the mortgage approval process and in determining the interest rate you’ll pay.
Generally, the lower your LTV, the less risk you pose to the lender, which can result in more favourable terms for your mortgage, depending on the lender’s product thresholds.
How LTV Affects Mortgage Rates
Lenders typically offer their best mortgage rates to borrowers with a lower LTV, usually at 60% or below.
As the LTV increases, so does the perceived risk, leading to higher interest rates.
For example, a borrower with a 60% LTV might secure a significantly lower interest rate compared to someone with a 90% LTV.
Impact on Mortgage Availability
Your LTV also affects the number of mortgage products available to you. With a higher LTV, such as 95%, you might find that fewer lenders are willing to offer you a mortgage, and those that do may charge higher interest rates.
On the other hand, a lower LTV gives you access to a broader range of mortgage deals, often with more competitive rates.
LTV Bands: What Are They?
Mortgage lenders often group their products into different LTV bands or tiers. These bands typically range in increments of 5% or 10%, such as 60%, 70%, 75%, 80%, 85%, 90%, and 95%.
Each band represents a different level of risk for the lender, with lower bands being less risky and therefore offering better terms.
For example, if you have a 25% deposit and a 75% LTV, you might fall into a more favourable band than if you only had a 5% deposit and a 95% LTV. The band you fall into can significantly influence the mortgage deals you are offered.
Lenders however have different LTV thresholds so to be sure of your options, you should speak with a professional mortgage adviser.
How LTV Changes Over Time
Your LTV isn’t fixed; it can change over time based on two main factors: the repayment of your mortgage and changes in your property’s value.
Decreasing LTV
As you make mortgage payments, particularly with a repayment mortgage, the amount you owe decreases, which in turn lowers your LTV.
Additionally, if the value of your property increases, your LTV will decrease further, potentially giving you access to better mortgage deals when you remortgage.
Increasing LTV
Conversely, your LTV can increase if the value of your property decreases. This scenario can be particularly concerning if it pushes your LTV above 100%, meaning you owe more on your mortgage than your property is worth—a situation known as negative equity.
Maximum and Minimum LTVs
Most lenders set a minimum deposit requirement, usually 5% or 10%, resulting in a maximum LTV of 90% or 95%. This is different with all lenders so you should speak with a qualified mortgage broker for guidance.
How Kerr & Watson Can Help
Understanding LTV and how it impacts your mortgage options is recommended, but these decisions can still be complex
We provide personalised mortgage advice tailored to your unique circumstances. Our expertise ensures that you find the best mortgage deal, whether you’re a first-time buyer, looking to remortgage, or moving home.
We work closely with a wide range of lenders, giving you access to the most competitive mortgage products on the market. By analysing your LTV and other factors, we help you secure a mortgage that fits your financial situation.
Conclusion
Loan to Value (LTV) is a key factor in mortgage lending that affects your borrowing costs, mortgage options, and overall financial strategy.
Understanding your LTV and working to lower it where possible can open doors to better mortgage deals and save you money in the long term.
At Kerr & Watson, we’re committed to helping you find the mortgage that best suits your needs. Contact us today for expert advice and let us guide you to the best possible mortgage solution for your situation.
