What is loan to value?
Loan to value (LTV) is the ratio between what you borrow and what your house is worth.
The lower the LTV ratio, the better security the lender has in the event you fail to pay your mortgage and the lower the rate your lender will offer you.
This means that if they have to repossess the property, they are more likely to be able to sell it and recover all of the money they have leant you, and that is why those with lower LTV mortgages are considered lower risk borrowers.
A higher LTV is a bigger risk to lenders, especially in the event of a property market crash.
Loan to value and equity.
The best rates are usually available to those who have at least 40% equity, meaning their LTV is under 60%; additionally, you can need a higher credit score to be able to achieve a higher LTV mortgage.
Where property values tend to increase over time, LTV tends to decrease over time, even for those with interest-only mortgages whose monthly repayments are not reducing their mortgage balance.
Borrowers who owe more than the value of their property and are said to be in “negative equity”.
How to work out your LTV.
If you already have a mortgage and know the current valuation of your home, you can work out your LTV using our simple formula below:
Mortgage left to pay: £200,000
Divided by
Your house valuation: £450,000
Times by 100
Equals = 44% LTV
If you’re a first-time buyer and you’d like to calculate your LTV, you also need to consider your deposit amount, For example:
Your house value: £250,000
Minus
Your deposit amount: £25,000
Equals
The mortgage you need: £225,000
The formula:
£225,000 divided by £250,000 times by 100 = 90% LTV
What else you should know about.
For those borrowing over 75% loan-to-value, some lenders require you to pay an additional fee for an insurance policy (often called a “higher lending charge”), which covers the risk that the lender doesn’t sell the property for enough to clear the whole mortgage balance in the event of repossession.
Speaking to a broker.
Since you last remortgaged, your LTV has most likely improved, so you could find a better rate than what your current lender is willing to offer.
If your due to remortgage within the next 6 months, speaking to a qualified mortgage broker could help you save money each month. Our team our on hand to highlight to you the best deals available on the market.
For a free initial consultation call, get in contact by dialling: 01489 346624 or visit our contact page by clicking here.
