What is Loan To Value (LTV)?

When you start looking at the mortgages on offer to you, there will be several criteria set by each lender, mainly relating to your minimum required income for the loan amount, the minimum deposit you must raise and other criteria such as credit history and the number of working years you have left. One of the most important criteria is the lender’s maximum Loan to Value (LTV) ratio. So, what is Loan to Value?

As the name suggests, LTV is the maximum amount that the lender will consider loaning to you as a percentage of the value of the property. For example, if you were buying a property valued at £300,000 and you have £35,000 available for deposit you would need to borrow the remaining purchase price. In this case, the required loan would be £265,000.

If you have a loan of £265,000 on a property valued at £300,000, then the Loan as a percentage of the property’s value would be 88.33%. This is the Loan to Value Ratio. If a lender will lend up to a maximum of 90% LTV then you have met the criteria with a loan to value of 88.33%. But if you only had £25,000, the Loan to Value Ratio is 91.67% which is over the lender’s 90% Maximum LTV Ratio. In this instance, you will either need to find another lender that will lend you money at a higher LTV Ratio (say 95% in this instance) or you’ll need to scrape together a bigger deposit.

It is worth noting that the lower the Loan to Value Ratio, the better the other terms of your mortgage are likely to be as a result. For example, a mortgage with a maximum Loan to Value Ratio of 60% would probably be offered with a lower interest rate. This is because the more of your own money used to make the purchase, the less the lender’s money is ‘at risk’ if you stop paying the mortgage or the property falls in value for any reason.

Loan To Value (LTV) Equation:

Loan to Value is a critical tool used when lender’s measure risk and, as a house buyer, the Loan to Value Ratio will quickly determine the maximum house price you can afford. To quickly calculate the maximum house price you can afford, simply use this equation:

100   x  Your Deposit     =    Your Maximum Affordable House Price  (100 - Max LTV)

An Example:

If you have a deposit of £20,000 and the maximum LTV available from lenders in the mortgage market is 95% then the calculation to establish the maximum amount you have to spend would be as follows:

100  x   £20,000 Deposit = £400,000 Maximum Affordable House Price.

(100 - 95 LTV)

Of course, there are other criteria, such as your household income to consider and the lender will have set maximum lending criteria in relation to your income too. So if the Maximum Loan your lender will consider is 4 x Gross Annual Income, you would need to be earning £95,000 per annum to borrow £380,000 and buy a £400,000 property with a deposit of £20,000.  As you can see, it can be a minefield and this is why we recommend that you come in and talk to us.

We can advise you on the best options available to you and manage the whole process from start to finish. For a friendly chat with no obligation, call us on 01628 507477 or email us team@mortgagerequired.com.

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