Loan to value (LTV) is an example of property jargon that is both self-explanatory and confusing at the same time. While most will get the ‘gist’ of what loan to value means, some will struggle to grasp the importance of it and the role it plays when trying to buy property.
Today, we’ll put that right.
What is loan to value?
In basic terms, loan to value is the amount you wish to borrow, expressed as a percentage, in relation to the overall value of the property you’d like to buy. So, for example, if you have a deposit of £70,000 ready to put against a property worth £350,000, your LTV would be 80%, as 20% would be put forward by you with the remaining amount coming from a mortgage provider, hence loan to value.
Calculating your loan to value
Arriving at this percentage involves a little math. Thankfully, though, the calculation is pretty straightforward!
Here’s how it’s done:
DEPOSIT divided by PROPERTY VALUE times 100
So, for the above example, the calculation would look like this:
70,000 ÷ 350,000 = 0.8
0.8 x 100 = 80 (expressed as a percentage: 80%)
Why loan to value is critical
It all comes down to risk. If you are working with a high loan to value, lenders will see you as a client with a higher risk than someone who has a lower LTV. Mortgage providers look at loan to value to gauge how likely you are to default on your loan - the less equity you have, the higher the risk.
The reason for this seemingly blanket analysis is quite simple; if you were to default on your mortgage and the property was sold to recoup the money, there is a greater likelihood that the lender would make a loss as your equity stake is so low.
This is because there’s no guarantee the property will increase in value. If you default on a large mortgage and the market goes the wrong way, the lender will be left out of pocket...which is obviously something they’re not too keen on! In order to cover the risk, they’ll up the interest on your loan, leaving you with a higher monthly repayment.
What is the loan to value threshold?
There are a few lenders out there who are once again willing to offer mortgages with no deposit down, but these 100% loans are difficult to find and offer extremely poor rates to those who have no other choice. You’ll also likely need to find a guarantor to get a 100% mortgage these days, which is a far cry from the pre-2007 market that caused the biggest economic crisis since the 1920s.
So, if 100% mortgages should be avoided at all costs, what is the maximum loan to value mortgage out there? Typically, you can find deals at 95%, meaning you put down a deposit of just 5% to buy a property. While this may sound great, it’s important to remember what we’ve already stated above - you will be viewed as high risk if you opt for a mortgage with this LTV.
Check out our guide to UK mortgage types to see what’s available to you.
Why a better LTV means better mortgage choices
Increasing your loan to value is always a good idea as it will open up greater choice in the mortgage market, and that increased competition between lenders means better deals for buyers.
While this may sound obvious, what many don’t realise is the majority of mortgage providers operate on a 5% basis, which means for every 5% the LTV comes down, the greater choice you’ll have. Therefore, if you’re LTV currently stands at, say, 82%, it’s well worth trying to get that figure down to 79%, as this will unlock better mortgages choices reserved for the 75% to 80% bracket rather than the 80% to 85% range you’re currently in.
Ways to reduce your loan to value
Unfortunately, there aren’t a great deal of options here. In fact, you only really have two to work with: reduce the loan amount or increase your portion of the purchase with a larger deposit. Our guide to property deposit saving is worth reading if this is a route you’d like to explore.
That’s it for LTV. If you have any other property related questions or are looking to buy, sell, rent, or let in East London or West Essex, give us a call today.
