How loan to value (LTV) ratio affects your mortgage
Find out how LTV ratio affects the mortgage deals you get, and what is a good loan to value ratio for you.
'Loan to value’ ratio means ‘How much of your property’s value is being paid for by your mortgage?’
It’s a very important figure for homebuyers and remortgagers alike, as it can have a huge impact on your borrowing power and on the overall cost of your mortgage.
The lower the LTV, the better as it means you’ve got more equity in your home and are less reliant on borrowed money to buy your home.
Try our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be.
Here’s our guide to understanding loan-to-value ratio, and what it means for you.
Your loan-to-value (LTV) ratio measures your mortgage amount relative to your property’s total value.
If you have a lower LTV you will be able to access cheaper mortgages, reducing your monthly repayments.
If you have a higher LTV you’ll need to pay more for your mortgage and face stricter lending criteria because lenders will regard you as higher risk.
As you pay off your mortgage over time your LTV will reduce, meaning you may be able to access better deals when you remortgage.
What is loan to value (LTV) ratio?
When you look at taking out a mortgage, you’ll find lenders and brokers referring to a ratio called loan to value (LTV). This is the size of the loan relative to the property’s total value, and is often expressed as a percentage.
For example, if you buy a property and put down a 10% deposit, you’ll need a 90% mortgage (90% LTV). Or, if you’ve owned your home for a while and now have 40% equity in it, you’ll be able to remortgage with a 60% LTV mortgage.
Why LTV is important for lenders
The LTV you’ll require when you take out a mortgage is one of the most important considerations for lenders and has a significant bearing on the rate you get on your mortgage.
The more equity you have in your property the lower risk you’ll be viewed as by lenders; they want the assurance that they will not lose money by lending to you, even if you fail to keep up repayments.
If you can’t repay your mortgage, then lenders always have the option of repossessing your house and selling it to recoup the value of the loan.
However, if property prices fall, there is a risk that the sale of the property won’t cover the outstanding balance.
For this reason, a high LTV makes lenders jumpy: a home bought with a 90% mortgage would only have to lose 11% of its value to go into ‘negative equity’, where the sale price wouldn’t cover the balance on the mortgage.
This means that lenders will insist on tougher terms if you have a high LTV ratio – which means higher interest rates and perhaps higher fees too.
They much prefer lending to people with a low LTV (e.g. a 70% mortgage) as this poses a much lower risk that they’ll lose money.
Consequently, the best mortgage deals will be reserved for those borrowers that only require a low LTV loan.
In short, if you have a lower LTV, you’ll have lower interest payments and will end up paying less for your property overall.
How do I calculate my loan to value ratio?
If you are preparing to buy your first home, a key element will be the size of your deposit, i.e. the cash lump sum you have saved up to use alongside the mortgage.
Once you know this, you can calculate your LTV ratio. Subtract your deposit from the total value of the property, and the result is the size of the mortgage loan you will need.
Your LTV ratio is your mortgage expressed as a percentage of the total property value.
For example, if you have a £20,000 deposit and are buying a £200,000 house, your deposit is 10% of the total value.
Your mortgage will have to cover the remaining 90%, (giving you a 90% LTV).
What are the loan-to-value bands?
The table below shows the difference your LTV makes on both the mortgage rate you get and the size of your monthly repayments (based on a competitive two-year fixed-rate mortgage on a £300,000 house, over a 25-year term).
| LTV | 90% | 85% | 75% | 60% |
|---|---|---|---|---|
| Interest rate | 4.03% | 3.73% | 3.61% | 3.55% |
| Loan amount | £270,000 | £255,000 | £225,000 | £180,000 |
| Monthly cost | £1,430 | £1,308 | £1,140 | £906 |
Your LTV ratio will change over time, both as you pay off more of the loan and as the value of your property changes.
Keep an eye on changes in the property market and the impact on your LTV ratio, especially if you choose to remortgage.
What is a good loan to value ratio in the UK?
Unsurprisingly, first-time buyers tend to have a higher LTV ratio, so their monthly payments are higher than those moving from one house to another. The average ratio for first-time buyers is 77.1%
Typically home movers who have been paying off their mortgage for a while and have benefited from rising house prices, will have a lower LTV.
What is the maximum LTV a mortgage lender will allow?
It is sometimes possible to get a 100% mortgage under certain circumstances, where you borrow the full purchase price and don’t put down any deposit. However, such deals usually come with strict conditions.
The vast majority of 100% mortgages require guarantors (e.g. the buyer’s parents) who are willing to take responsibility for the loan if the buyer can’t keep up with repayments.
Typically, the guarantors’ own home is used as collateral (if the sale of the property being bought does not cover the outstanding mortgage). Additional mortgage insurance might also be necessary.
A mortgage broker can help you find these 100% deals and decide whether they are suitable for you.
However, for most first-time buyers it makes sense to wait until they can afford to pay a 5-10% deposit.
A mortgage broker’s fee can vary from around 0.35% of the loan size to up to 1%. So, for a mortgage of £150,000, a 0.35% fee would amount to around £500.
A mortgage broker’s fee can vary from around 0.35% of the loan size to up to 1%. So, for a mortgage of £150,000, a 0.35% fee would amount to around £500.
Learn more: how much does a mortgage broker charge?
Which loan to value ratio should I go for?
With LTV ratio, a good rule of thumb is ‘as low as you can go’.
The bigger your deposit in relation to your property value, the better mortgage deals you will be offered, the lower your repayments will be, and the less money you’ll repay overall.
It’s sad but true: the more money you have to buy a property, the less you need.
On the other hand, there can be some advantages to buying with a smaller deposit (and thus a higher LTV ratio).
For one thing, you should be able to buy sooner, get on the property ladder, save on rent and benefit from any increases in house prices.
The longer you wait, the more house prices may rise out of reach – unless you can save at a faster rate.
As with many things, it’s a balancing act. What you may be able to do is buy with a high LTV ratio and then try to reduce it step by step every time you remortgage.
Remember that you may benefit from more income in the future (such as from pay rises, gifts or inheritances) so your first mortgage is only your first step.
What happens to my LTV if the value of my house drops?
The value of your property is likely to change over time as the economy expands and contracts. If its value falls sharply, your LTV may increase.
And, if it falls particularly sharply, you could end up in ‘negative equity’.
This is when the sale proceeds of your home would not be enough to repay your outstanding mortgage.
For example, if you buy a £200,000 property at a 90 per cent LTV ratio, you owe the lender £180,000.
But if six months after buying the property its value falls to £150,000 (e.g. as a result of market conditions), you will owe the lender more than the property is actually worth.
This could create problems if you need to sell the property or remortgage.
How does my LTV ratio affect remortgaging?
Just as when you first buy a home, your LTV ratio will affect the choice and quality of the mortgage deals you will be offered.
However, this time some additional factors are involved: how much of your mortgage you have already paid off, and how much your home has risen in value.
If you have been paying off your loan for a while, and your home has also gone up in price, then your LTV will be lower than it was when you first took out your mortgage.
This means that better deals may now be available, with lower interest rates.
Alternatively, you may be able to keep similar interest rates but borrow more money against your equity (for example for home improvements, to further boost the value of your home).
Remortgaging therefore tends to be easier in a rising property market – less so if prices are falling.
Seek expert financial advice
Understanding your loan-to-value ratio is essential for making informed decisions when buying a home or remortgaging.
A lower LTV ratio can unlock better mortgage deals, lower interest rates, and reduce the overall cost of your loan, while a higher LTV can mean higher costs and greater financial risk.
Your LTV ratio isn’t static, it changes as you repay your mortgage and as property values fluctuate, so it’s important to monitor it regularly.
Whether you’re a first-time buyer or looking to remortgage, seeking professional financial advice can help you secure the best mortgage terms and make the most of your financial situation.
A mortgage broker or financial adviser can guide you through the process, helping you navigate the complexities of LTV and ensuring you make a well-informed decision that aligns with your financial goals.
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