Loan-to-value, or LTV, can be confusing for many people.
In our guide to LTV below, we answer the questions you are most likely to ask when considering your options to buy, or sell property, or if you are applying to remortgage or enquiring about equity release.
What does Loan-to-Value mean?
When considering mortgages on offer, you will need to meet several criteria set out by lenders including your minimum income required for the loan, minimum deposit, credit history, number of working years available, and importantly LTV. LTV is the maximum amount a lender will consider loaning to you as a percentage of the property, basically the size of your mortgage as a proportion of the value of your property. So if your property is worth £300,000 and your mortgage is £225,000, the LTV would be 75%, meaning that your equity, the amount you own, is £75,000.
Why is LTV important?
The higher your LTV, the higher the risk is for the lender. They stand to make a loss if your property falls in value below the value of your mortgage, or if you default on your mortgage for whatever reason. You will find mortgage rates will be significantly less competitive if you have a high LTV with little equity, so the chance to remortgage becomes more difficult. The lower the LTV, the less risk to the lender as more of your money is used, giving you access to more options and better mortgage terms - including lower interest rates.
How do I calculate the LTV rate of my home?
LTV is a percentage figure that reflects the proportion of your home that is mortgaged, and your equity. To find out where you stand with LTV on your home, you first need to divide your mortgage by the value of your home, and then multiply that number by 100 to determine what the percentage will be. So if your mortgage amount is £225,000 and your property value is £300,000, when you divide £225,000 by £300,000 you will get 0.75. Multiply 0.75 by 100 and the result is 75. This means that your LTV is 75% and your deposit is 25% or £75,000.
How do I get a good LTV rate for my home?
It is better to have a low LTV if you are considering remortgaging your property, but there are steps you can take to improve yours if it is not low enough. 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 will reduce with each payment, and so will your LTV. Overpaying on your mortgage will also decrease both loan and LTV sooner. 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.
Understanding what LTV means can help you to make informed decisions to prepare for when you come to remortgage. A more affordable LTV repayment will benefit your financial situation, boosting your household budget and helping your finances. Here at Norton, we specialise in remortgaging, and can help you to achieve the best possible rate, putting you in touch with the most affordable providers.