Loan to Value (LTV) is a phrase often used in the housing market, but very few understand what it actually means. In Lehman’s terms, LTV is the ratio between the value of the mortgage and how much the property is worth, expressed as a percentage. The remaining value is either the deposit amount if buying or the equity if you own your home.
For example:
Joe wants to buy a house worth £400,000 and has a deposit of £80,000. He will need a mortgage of £320,000 in order to purchase the property and his LTV will be 80% because 80% of 400,000 is 320,000.
What LTV brackets are available?
The lowest LTV bracket is usually 60% and will go up in 5% increments to the highest ratio of 95%.
Different lenders will offer different bracket variations but generally speaking anything below 80% is considered 'low'. That said, most lenders will only offer mortgage applicants the lowest rates at an LTV of 60% or below. This basically means... save, save, SAVE. Chunkier deposits equal less risk for the lender who in turn will reward you with more competitive rates.
Calculating your LTV?
Calculating LTV is fairly simple; just take the amount you need to borrow, divide it by the value of the property and then multiply the result by 100 in order to get its percentage value.
In reference to the above example:
320,000 ÷ 400,000 = 0.8
0.8 X 100 = 80
What if I have a mortgage renewal coming up?
Generally speaking, the value of your property will have increased since fixing in your last mortgage and you will have reduced how much you owe to the lender via your monthly repayments. In turn, this means there's more equity in your property, your LTV is lower and ta-dah... you've guessed it, you can access lower rates.
Your LTV goal
Whether you're a first-time buyer or set up in your forever home, it's really important to understand how your LTV ratio is affecting your overall borrowing costs. Looking at ways to decrease the LTV either by adding value to your property and/or overpaying on your mortgage is a sure-fire way to save more money in the long run.
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