What is LTV and why is it important?
LTV, or loan-to-value, is the amount of your mortgage in relation to what the property costs to buy, described as a percentage. For example, if you purchase a £500,000 home and put down £100,000 as a deposit, then your mortgage will be for £400,000, making the LTV 80%. This would mean that the property is 20% paid for. LTV is something that matters when it comes to getting a mortgage on a home.
How is LTV calculated?
LTV is calculated by dividing your mortgage by the cost of your property as a whole and then multiplying that number by 100. It is a good idea to continually calculate your LTV over the term of your loan to know if you might be able to switch to a better mortgage deal.
So, using the same example as before, if a home you want to purchase costs £500,000 and you put down £100,000, then you would divide 400,000 by 500,000 to get 0.8. You would then multiply 0.8 by 100 to get an LTV of 80%.
Why is LTV important?
LTV is important because it determines how much your mortgage will cost you. The LTV and equity are the main drivers for price, so as your equity increases, you begin to qualify for better deals. The lower the LTV, the lower mortgage rates are. Lenders take this into account when offering a mortgage deal. This is why it is important to put down a larger deposit, so that your mortgage will cost you less. Lenders tend to assume that mortgages with a higher LTV are at higher risk of defaulting or not getting paid off on time, so they tack on extra costs in the form of interest payments.
You can always remortgage to lower your LTV if you do not wish to overpay on your mortgage to get it paid off sooner. Often remortgaging to get a lower LTV will allow you to find better mortgage deals than the one you may currently have. The lower interest rates that come along with a lower LTV can save you in the thousands.
You can compare remortgage deals with our remortgage comparison tool, here.
Do mortgage lenders look at LTV?
Lenders look closely at LTV and consider it very important. Mortgages with a lower LTV are less risk adverse, so lenders are more likely to offer favourable rates.
Lenders assume that they are less likely to recover funds if a mortgage goes into arrears if the property has a higher LTV. Lower LTVs are less risk adverse in that a lender is likely to get back their money on a property that has 60% LTV versus one that has 90%. Lenders look at it like this: if your home declines in value, dropping below the price you paid, and you have taken out a large mortgage, then it is more likely the lender will lose money. For this reason lenders tend to take LTV very seriously and reserve the best deals for mortgages with below a 60% LTV.
What is a good LTV?
LTVs at 60% or below are considered the best in terms of getting the best mortgage deals. Ideally, lenders like to see LTVs at 80% or below. However, it is possible to sometimes find mortgage deals if your LTV is above 90%. These deals are not very common and often involve buying under certain conditions, such as by using the government help to buy scheme. We will get to that in a bit, though.
What are the different LTV thresholds for mortgages?
Loans are not offered at all LTV levels. Most lenders will want to see at least a LTV of 90%, although some may offer mortgages with a little as a 5% deposit. It is important to understand that the interest rates will be much higher on these loans in order to account for the risk involved.
Most mortgages are offered by lenders in three LTV thresholds, those being between 80% and 95% LTV, between 60% and 80% LTV, and below 60%. Again, the lower the LTV, the better of a deal you can get, so keep that in mind when saving up for a deposit. For this reason, it may be worth holding off on a home purchase until you have a larger deposit to put down, so that you can make the LTV lower.
How to lower your LTV
Getting your LTV to below 90% is ideal when going for a mortgage. If you are close to an LTV threshold, perhaps of 90%, but have 92% LTV, it is usually worth trying to come up with the rest of the funds to get your LTV below 90%. This will save you money in the long run as it will open up the market in terms of lower interest rates. Putting down a deposit of at least 40%, making your LTV 60% will pave they way for the best mortgage deals.
How can I avoid a high LTV?
Simply put, you can avoid a high LTV by saving up for a larger deposit. This may mean waiting to purchase a home. Again, the more you put down on a home, the better rates you will be offered by lenders. It is worth using a mortgage calculator, like the one on our site, to get an idea of how much you should put down on a home. Our mortgage comparison tool can also help you understand what types of rates are available with different deposit amounts. You can easily find out how much a mortgage will cost you at differing LTV ratios this way.
How can I buy a home with a high LTV?
It is still possible to get a mortgage if your LTV is high. Although you will likely be offered higher interest rates, you can find mortgage deals for LTVs at above 90% if you meet certain criteria.
Good credit rating
A good credit rating may help you find deals for home loans if you do not have a large deposit. The better your credit rating, the more likely you are to be offered mortgage deals with lower interest rates. Lenders take into account credit history, and with a solid credit record you may be able to mortgage a home with as little as 10% deposit, or sometimes even less.
Help to buy
The help to buy government scheme is one way you can purchase a home with a high LTV ratio. Help to buy is a government scheme that helps first-time-buyers with a property purchase without having to pay very high interest rates.
Before the housing market crash between 2007 and 2011, it was easier for buyers to purchase homes with a high LTV, even those as high as 100%. Lenders have since become much more strict with their lending criteria and without the help of the help to buy scheme, first-time buyers may find it difficult to get a mortgage.
Help to buy was created to help buyers purchase a property with as little as 5% deposit. The scheme helps in two ways. The first way the help to buy scheme works is by offering loans on new build homes, with the government offering the 20% loan for the deposit to the buyer. With thhe second way, which has more to do with LTV, the government supplies 15% of the value of the loan so that buyers can get a mortgage with 95% LTV. Both ways are excellent ways for first time buyers to get on the property ladder if they fall short of a sizeable deposit.
Our first-time buyer mortgage comparison service can help you compare mortgage rates if you are looking for your first home.
The bottom line
If you are not a first time buyer, and therefore not eligible for the help to buy government scheme, your best bet may be to simply save up for a larger deposit. It really comes down to whether or not you are after a cheaper monthly payment, or want to put down less money up front.
You can always remortgage your home down the line to get a better deal by putting more towards your property, and thus lowering your LTV and monthly mortgage repayments. Remortgaging has become popular with homeowners who have extra cash on hand, either from an inheritance, savings or a financial settlement and want to use the funds to get a better mortgage deal. You can compare remortgage deals using our remortgage comparison tool, here. No matter what you decide, it is a good idea to continue to keep an eye on your LTV during the term of your loan. You may find that as your LTV lowers, remortgaging is a good option.
LTV matters a great deal when it comes to getting a mortgage deal with lower interest rates. The higher the LTV, the higher the interest rates you are offered will be. This covers the lender in the case that your home value drops and becomes worth less than the amount your mortgage is for. Saving up, waiting to buy a home and looking for a cheaper properties are all ways you can decrease your LTV in order to come across better mortgage rates and save money in the end.