What is Loan To Value (LTV)?

When you start to look at mortgages lost of terminology and ‘buzz words’ will be thrown around. Like any area of commerce, people just love inventing their own technical jargon. This jargon can be a time-saving shortcut for the professional dealing with these matters all day, every day, but the downside is potential confusion for the customer.

There are several phrases it’s worthwhile knowing and one of the most important ones when you are trying to establish how much you can afford to borrow is LTV or Loan to Value.

Loan to Value refers to a ratio between two figures, namely the amount of money lent (the loan) and the value of the home you are buying (the value). In most cases the value of the home will be pretty much the same as the sum you have agreed to pay for it, but sometimes a professional valuer will disagree. They might think the value is higher or lower and this is important. We’ll discuss why later.

Mortgage companies such as banks and building societies have strict rules that govern their lending policies. Some of these rules have been imposed by Government after the 2008 ‘credit crunch’ and some have always been in place in one form or another. In simple terms, the rules are set to protect the lender and reduce their potential risk in the event that the borrower stops making their monthly payments. In this instance, eventually, the lender will want to see the property sold so as to get their money back, plus any interest and charges agreed between the parties at the time the loan was made.

In order to reduce the likelihood of this ‘nightmare’ scenario happening, the lender will undertake several calculations based on information received from the borrower and the borrower’s advisors and a mortgage valuer employed by the bank (but paid for by you) to establish the value of the property you intend to buy. The bank will have set criteria for lending based upon your income, your expenses, your job type, credit history, personal circumstances and the Loan to Value ratio (LTV).

The higher the Loan To Value, the less equity there is in the property when the loan is taken out and the riskier the loan is to the lender. For this reason, the higher the LTV, the more expensive your borrowing costs are likely to be. It therefore pays to put down the biggest deposit you can afford to put down if it reduces LTV and the cost of borrowing.

Most lenders require a minimum Loan To Value of 95%, meaning that you need to put down a deposit of 5% of the value of your purchase. The cost of borrowing 95% of your home will be relatively high, especially when compared to a borrower with an LTV of 75%.

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:

When you’re applying for your first mortgage, you will likely come across the term ‘Loan to Value’. Simply put, Loan to Value (LTV) refers to the ratio between the loan and the value of the property you’re buying and this ratio is expressed as a percentage. 

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:

Loan To Value is calculated as follows;

Amount borrowed x 100 = LTV in %
Value of property

If you are buying a home valued at £180,000 and you are looking to borrow £170,000 with £10,000 deposit, then your LTV is;

170,000 x 100 = 94.44%. This is just enough for some borrowers.
180,000

The problem to avoid is to agree to buy a home only to have a mortgage valuer place a valuation on the property lower than the purchase price. In this instance, you may need to renegotiate the price to a lower figure. If the seller refuses to do this, you may have a problem, but remember, do you really want to buy a property for more than it is worth? Most sellers will be reasonable when confronted with a lower valuation.

If you don’t have a large enough deposit, and your LTV is over 95%, don’t worry. Some lenders will offer larger mortgages in certain circumstances and the Government is currently offering buyers of new homes or older housing assistance through their First Home Schemes. Ask us for more details and to see whether you are eligible.

When you’re applying for your first mortgage, you will likely come across the term ‘Loan to Value’. Simply put, Loan to Value (LTV) refers to the ratio between the loan and the value of the property you’re buying and this ratio is expressed as a percentage. 

The LTV of a mortgage often has a direct impact on a mortgage offer and some LTV ratios are more desirable to mortgage lenders than others. If you’re wondering what LTV you should have when buying a house, keep reading today. 

What are the maximum and minimum Loan to Value mortgages?

Generally speaking, all mortgage lenders require you to have a deposit that is equivalent to at least 5% of the property’s purchase price. Therefore, their maximum Loan to Value would be 95%. However, some mortgage providers may only lend up to a maximum of 90% LTV and you may require a higher deposit if you wish to borrow from them. 

The majority of first-time buyers require a LTV of 85% - 95% and there are lots of different schemes available to help first-time buyers get on the property ladder. If you don’t have at least a 5% deposit saved, it’s beneficial to speak to a mortgage advisor about the different options available to help you buy your first home. 

Usually, there isn’t a minimum Loan to Value and as a general rule, the lower the LTV ratio, the better. However, some mortgage providers won’t want to lend below a certain LTV and you may need to explore the whole mortgage market if you’re looking for a very low LTV mortgage. 

How does the Loan to Value impact a mortgage offer?

As mentioned above; the lower the LTV ratio, the better. When you have a high LTV ratio, you are often considered a higher risk to lend to and the terms of the mortgage would reflect this. So, if you want to get a competitive mortgage, you need to have a higher deposit and it’s always beneficial to try and save as much as possible for your deposit. 

When you put more of your own money into the purchase of a property, mortgage lenders would usually offer you lower interest rates. This makes it cheaper for you to borrow the money you need to buy a home. Having more equity in your home is beneficial for several other reasons too, so if you’re able to, it’s worthwhile putting down a larger deposit. 

Of course, it’s important to remember that there are several other factors mortgage providers take into consideration when making you a mortgage offer. Everything from your employment status to your credit score could impact your mortgage offer and different mortgage providers have different criteria they use for lending. 

What’s the best Loan to Value for a mortgage?

There isn’t necessarily one LTV ratio that everyone should aim for when purchasing their first property and depending on your circumstances, as well as a mortgage lender's criteria, a certain LTV may be better for you than it would be for another borrower. 

That being said, most mortgage providers offer the most competitive terms to buyers with a LTV of 60% or less. There is much less risk involved with lending when you have a LTV that’s this low and mortgage lenders would likely want you to borrow from them, rather than another lender. 

Speaking to a mortgage advisor about Loan to Value ratios 

If you’re a first-time buyer and you have any questions about LTV ratios, feel free to contact our team at Mortgage Required. We provide professional mortgage advice and we can give you a useful insight into how LTV could affect your chances of getting a competitive mortgage. We love helping first-time buyers purchase their first homes, we will cut through the jargon and search the whole market to find a mortgage that meets your needs and budget. We are dedicated to making applying for a mortgage as hassle-free as possible for our customers and you can have peace of mind when you turn to us for assistance. 

For more information Contact us to speak to a mortgage adviser.