What Is Loan-to-Value?
You're bombarded with a lot of jargon when you start applying for a mortgage, such as fixed rate, SVR, interest only, cashback and more. One industry term that always crops up – and one you really need to understand – is loan-to-value ratio or LTV.
Your LTV is the ratio between your loan amount and the value of the property. It can be a little confusing as it's often expressed as a percentage. We show you how to work out your LTV manually, below.
The Topics Covered in this Article Are Listed Below:
- What Is Loan-to-Value?
- What Is My Loan-to-Value?
- How to Work Out LTV
- What Your Loan-to-Value Means for Repayments
- What Does LTV Mean for Your Mortgage?
- What Is a Good LTV for a Mortgage?
- How to Calculate Loan-to-Value
- Compare Mortgage Rates by LTV
- Calculating LTV for Buy-to-Let Mortgages
- How Does LTV Change My Mortgage Options
- After You've Used the LTV Calculator
What Is My Loan-to-Value?
You can work out your LTV with our loan-to-value calculator.
Simply enter your property value and either your deposit or loan amount and hit the Calculate button.
Please note that the maximum LTV on a mortgage is 100% but most products go up to 95% LTV.
This is not a quotation under the Consumer Credit Act. Mortgage application approvals are also subject to validation of income, credit checks and a property valuation.
How to Work Out LTV
You can work out your LTV by dividing your loan amount by the value of the property and then multiplying this number by 100.
- You want to buy a house for £400,000
- You have £80,000 in savings that you want to put down as a deposit
- You take out a mortgage/loan to cover the remaining amount: £400,000 - £80,000 = £320,000
- Your LTV is: (£320,000 ÷ £400,000) x 100 = 80%
What Your Loan-to-Value Means for Repayments
It's important to note that you'll only repay and be charged interest on the amount you borrow, not the full value of the property. Therefore, you want your loan-to-value to be as low as possible as the less you borrow, the less you have to pay back in the long term.
The maximum LTV you can take out on a mortgage is typically 95% which means the minimum deposit you'd need to put down is 5%.
What Does LTV Mean for Your Mortgage?
Lenders use LTV to assess the risk of lending money to mortgage applicants. From a lender's perspective, the higher the LTV, the riskier it is for them to lend to you. They may charge you a higher interest rate or ask you to provide additional evidence of your income to ensure you can afford the repayments.
What Does LTV Mean for Your Remortgage?
Essentially, the lower the LTV, the better the deals available to you. When it comes to remortgaging, even switching from a 95% deal to a 90% one can reduce your interest payments. Bear in mind that ERCs (early repayment charges) may apply, depending on the terms of your mortgage and when you exit a particular mortgage arrangement.
What's a Good LTV for a Mortgage?
A good LTV for a mortgage can depend on your financial situation, the property's value and the lender's requirements. A lower ratio is generally considered better. As a general rule of thumb, a low LTV is anything from 75% with a 25% deposit and below. A 75% LTV will give you lower interest rates, while a 65% LTV for example could give you access to even more competitive deals.
Nonetheless, saving 25% for a deposit can be quite challenging for many people, especially first-time buyers which is why there are many mortgage options available for borrowers with LTVs at 80%, 90%, and even 95%. There are even a few 100% LTV mortgages products on the market. However, bear in mind that the higher the LTV, the more interest you'll pay.
How to Calculate Loan-to-Value
Calculating your loan-to-value ratio is relatively straightforward. All you need to do is divide the amount you want to borrow by the property's total value. You should then multiply the result by 100 to get a percentage. For instance, if you want to buy a property worth £250,000 and have a deposit of £30,000, you'll need to borrow the remaining £220,000. You'll therefore need to divide 220,000 by 250,000, which equals 0.88 – giving you an LTV of 88%.
Our LTV calculator offers a quick and easy way to calculate your LTV.
Compare Mortgages Rates by LTV
Comparing mortgages by LTV is a key part of choosing a mortgage. A lower LTV is traditionally considered less risky for lenders and enables borrowers to access more competitive deals.
To compare mortgages by LTV, you can use our first-time buyers best buys tool. You simply enter the property price and the amount you want to borrow. Our best buys will use this information to present you with mortgage deals at that LTV. If you want to know exactly what LTV the deals presented to you are, you can enter the property price/value and the loan amount required into our LTV calculator above.
Note that your LTV will change after you take out your mortgage as your property's value changes and as you pay off more of the mortgage loan. This means that after some time, once you’ve built up more equity in your property, you’ll be able to provide a bigger deposit when you move home or remortgage onto a better deal.
Calculating LTV for Buy-to-Let Mortgages
Lenders consider buy-to-let mortgages to be riskier and therefore offer at lower LTVs than standard residential mortgages. The maximum you can expect to borrow on a buy-to-let mortgage is 75% - 80% of the property value.
To calculate the LTV for a buy-to-let mortgage, you'll need to know the value of the property you want to buy, for example, £300,000. You must also know the amount you’ll have in deposit, e.g. £75,000 and therefore what you plan to borrow from the lender, e.g. £225,000. You must divide the loan amount by the property value and multiply the total by 100.
LTV = (£225,000 / £300,000) x 100 = 0.75 x 100 = 75%
This calculation shows that the LTV is 75%. The mortgage loan will cover 75% of the property value and the deposit will cover 25%. Based on this LTV, the lender may require a rental income between £1,052.34 and £1,192.97 to support the mortgage. This assumes an interest rate of 4.49% to 5.09%, and the lender requires 125% of the monthly interest payment as rental income.
You can also use our mortgage loan-to-value calculator to easily work out the LTV of your buy-to-let.
How Does LTV Change My Mortgage Options?
With a high LTV, you're likely to access fewer mortgage products, face higher interest rates and mortgage fees, and will borrow a larger amount. In contrast, a lower LTV will improve your chances of getting approved for a mortgage, give you access to more mortgage products and save you money with a lower interest rate and fees.
Over time, your property's value will likely change as the economy fluctuates. If your property's value falls sharply, your LTV may increase, and you could find yourself in negative equity. This means you owe the lender more for your mortgage than the property's current value.
For example, if you purchase a property for £200,000 at a 90% LTV, you owe your lender £180,000. But if market conditions cause the property's value to fall to £150,000 after 6 months, you'll owe the lender more than the property is worth. This could make it difficult for you to remortgage or sell the property.
If, on the other hand, your home has gone up in value and you've been paying towards your mortgage for some time, your LTV will be lower than when you originally took out the mortgage. This means that you may now be able to access better deals with lower interest rates.
After You’ve Used the LTV Calculator
Now you’ve worked out your LTV, you’re ready to start looking at the mortgage deals on the market now. You can also call us on 0330 433 2927 to speak to an adviser.