In partnership with the Financial Services National College (FSNC).
Do you find loan-to-value (LTV) puzzling? Are you confused about the difference between a 40% LTV and a 95% LTV? You’re not alone.
Below, you can find a short guide which explains how LTV works to help you find the right mortgage.
What is LTV?
If you are looking to buy a property, you’ll need to put down a deposit. The higher the deposit generally means that you qualify for a better mortgage deal as lenders are likely to be convinced you are less of risk and will not default on any of your payments. The rest of the property price will be paid in monthly instalments through a mortgage. This is where LTV comes into play.
LTV, or loan-to-value, put simply is the difference between the value of the home you want to purchase and the amount of money you need to borrow to be able to pay for it. The lower the LTV means you own a larger slice of the property. The higher the LTV, the smaller the slice and the riskier you are to mortgage lenders.
LTV is one of the central factors in deciding not only if you can obtain a mortgage, but also which one you can take out.
How do you work out your LTV?
Simply take the amount you need to borrow, divide it by the value of the property and then multiply the result by 100 in order to get the percentage.
Example one: if you have a mortgage of £240,000 on a house that is worth £300,000, you have a LTV of 80% - a high LTV.
240,000 / 300,000 = 0.8
0.8 x 100 = 80% (and your deposit is 30%)
Example two: if you have a mortgage of £250,000 on a house that is worth £500,000. You have a LTV of 50% - a mid-range to low LTV.
250,000 / 500,000 = 0.5
0.5 x 100 = 50% (and your deposit is 50%)
What is a high LTV?
The higher the LTV, the riskier you are to lenders which means in some circumstances it may be difficult to obtain a mortgage with better terms.
You can avoid a high LTV by saving as much as you can for a deposit. This means when it comes to finding a mortgage, you will be offered better terms because you are deemed less of a risk. This may mean waiting a little but longer to purchase your home. However, in the long run it may be worth it.
A high LTV is often sought by first-time buyers who have little up front capital for a deposit. However, given the risk involved, many opt instead to go through affordable housing schemes such Shared Ownership and Help-to-Buy Equity Loan, which offers better security under specific terms and conditions.
What is a low LTV?
If you can afford a reasonable deposit, the LTV will be lower and will work out better in the long run, with both a lower interest and overall capital value to pay off.
LTV and first-time buyers
LTV is often a concern for first-time buyers who might be struggling to save for a large deposit and because of this, they tend to opt for a higher LTV with the hope of remortgaging to a lower rate later on.
However, as a high LTV carries with it risk, first-time buyers need to weigh up whether it makes financial sense to step onto the property ladder with a minimum deposit, instead of continuing to grow their nest egg. This is because the larger the deposit saved, the lower the LTV. It means a better mortgage deal can be obtained.
This is where the government’s Help-to-Buy scheme comes as it helps borrowers secured a 95% LTV mortgage on a new build property. An equity loan of up to 20% of the property’s value is eligible to borrowers who then need a 5% deposit to secure a mortgage through a participating lender. The scheme allows first-time buyers the freedom to take a 75% LTV mortgage, which are more readily available than 95% LTV mortgage and have better terms.
Read our first-time buyer guide for further information about affordable housing schemes.
LTV and moving house
LTV is just as important to consider if you are moving house or remortgaging. For example, if you have been paying off your mortgage for several years and the property market has been stable or increased; your property will have absorbed greater equity. This means you will be able to take out a mortgage with a better LTV rate and better conditions once sold.
However, if the property market is unstable it is worth considering if moving house one or two years later might make better financial sense. Although not ideal, this is to ensure you get the lowest LTV possible, saving yourself some money in the long run.
Where to go next
If you are looking for a mortgage or have further questions about what loan-to-value means for you, please contact us and arrange an appointment. Alternatively, you can visit your local branch. We provide a tailored and individual service, and we are available for Saturday appointments.
YOUR MORTGAGE IS SECURED ON YOUR HOME. THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.