Whether you’re looking to buy a new property or applying for a remortgage, it’s important you understand the loan-to-value (LTV) ratio.
It’s how lenders and brokers determine your interest rates and mortgage fees, so if you’re in the housing market it’s an important thing to know.
In this guide, we’ll answer your most frequently asked questions about LTV, including:
- What does loan-to-value mean?
- Why is LTV important?
- How to calculate your loan-to-value ratio
- What is a good loan-to-value ratio in the UK?
- How to work out your LTV when remortgaging
What does loan-to-value mean?
Loan-to-value is the maximum amount a mortgage lender will consider loaning to you, as a percentage of the property in question.
When you apply for a mortgage, lenders will look at a set of criteria as they assess your application and potentially give you an offer. These include things like your deposit size, income, credit history, and importantly, your LTV.
So, if your property is worth £300,000 and your mortgage is £225,000, the LTV would be 75%. Then, your equity – the amount you own – would be £75,000.
Lenders can also use loan-to-value ratio for other types of secured loan, but it’s most commonly applied to mortgages.
Why is LTV important?
The higher your LTV, the higher the risk is for the lender. If your property’s value drops below the value of your mortgage, or you default on your repayments, the lender stands to make a loss. For this reason, you’ll find mortgage rates are significantly less competitive if you have a high LTV, with higher interest rates and even fees.
Those with a lower LTV pose less risk to the lender as you’ve invested more of your own money, giving you access to a wider range of options and better mortgage terms - including lower interest rates.
How to calculate your loan-to-value ratio
LTV is a percentage figure that reflects the proportion of your home that is mortgaged and your equity. To calculate the loan-to-value on a property you are wanting to buy or your current home, you need to follow these steps:
- Find out your mortgage amount.
- Find out the current value of your home.
- Divide your mortgage amount by the value of your home.
- Multiply that number by 100 to determine the percentage.
For example, if your mortgage amount is £225,000 and your property value is £300,000, when you divide £225,000 by £300,000 you get 0.75. Multiply 0.75 by 100 and the result is 75. This means that your LTV is 75% and your deposit (or equity) is 25% (£75,000).
Your home’s LTV ratio will continue to change as you pay off the loan and the property value changes. Just bear in mind that the housing market can go both up and down, so look out for any fluctuations that may impact your LTV for selling or remortgaging.
What is a good loan-to-value ratio in the UK?
There isn’t really a simple answer to this, as it’s the lender who will decide whether your loan-to-value ratio puts you in their good books. Just remember that the lower your LTV ratio is, the lower your perceived risk and so, the lower your monthly repayments.
But a high LTV isn’t the end of the world. In fact, for some people, it means you can get on to the housing ladder with a smaller deposit. Your credit score may affect whether you can apply for a high LTV mortgage.
How to work out your LTV when remortgaging
When it comes to remortgaging, it’s better to have a low LTV, as it gives you access to a wider range of mortgage options with lower interest rates.
If you are on an interest-only mortgage, your LTV will simply remain the same, as you are only paying interest and not affecting the balance. But, with a repayment mortgage your balance should reduce with each payment, and so will your LTV.
You can follow these same steps to calculate your loan-to-value ratio:
- Divide your mortgage amount by the value of your home.
- Multiply that number by 100 to determine the percentage.
Just remember to use the remaining amount left on your mortgage, rather than the initial loan amount, and check how much the house is currently worth, rather than what you originally paid.
What if my property value changes?
If the property value has increased in this time, you should have a much lower LTV. However, if the property value has fallen, you may owe the lender more than the property is worth, which can cause issues with remortgaging.
Regular home maintenance will minimise loss of value if house prices go down, while significant home improvements could add value to your property - both lowering your LTV and boosting your equity for when you need to remortgage.
At Norton Finance we specialise in remortgaging, and can help you to achieve the right rate, putting you in touch with the most affordable providers. Get in touch today.
This article was updated in June 2021
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