John Fitzsimons
Tim Leonard
Your loan-to-value or LTV ratio is an important factor in determining the mortgage rates you’re able to get. Generally, the lowest mortgage rates are offered to those with lower LTVs.
What is loan-to-value (LTV)?
LTV is short for loan-to-value and is a ratio used by lenders to express the size of your mortgage relative to the value of the property you are borrowing against. Loan-to-value ratios are usually shown as a percentage, so that it is said you’re borrowing at 85% LTV, for example.
How to calculate LTV
To work out your LTV ratio you divide the size of the mortgage you’re borrowing by the current value of your property and then multiply the number you get by 100.
For example, if you are buying a property for £200,000 and need to take out a mortgage for £180,000, your LTV is 90% ‒ 180,000 divided by 200,000, multiplied by 100. In turn, this means that you must have a deposit equal to 10% of the property value, so £20,000, to put down.
What is my LTV when I remortgage?
To calculate your LTV when you are remortgaging, you divide the balance of your outstanding mortgage by the current value of your property, and then times the number you get by 100. The larger the amount of equity you have in your property when remortgaging, the lower your LTV.
» MORE: How remortgaging works
How does LTV affect your mortgage?
Loan-to-value has a key role to play in the pricing of mortgage deals. Lenders will offer products at different LTV bands or tiers, with the interest rates on offer tending to increase as you move higher up the tiers.
For example, lenders typically offer their best rates on products that are available up to a maximum of 60% LTV, where a borrower has at least a 40% deposit or equity in their property. On the other hand, the highest mortgage rates are usually charged at the higher LTVs, such as 95% LTV, if you only have a 5% deposit.
It all comes down to risk. The higher the LTV, the smaller your deposit or stake in the property and the riskier you are viewed as a borrower. In turn, the more you can expect to pay.
Your LTV will also make a difference to the number of mortgage deals open to you.
If you have only a 5% or 10% deposit and therefore a high LTV then you may find there are fewer mortgages to choose from. In contrast, if you have a significant deposit and a lower LTV, you’ll likely have a wider selection of mortgages from which to choose.
» MORE: See the latest mortgage rates
What is a good LTV?
Generally, any loan-to-value lower than 80% is thought to be a good LTV, while anything at 80% or above tends to be considered a higher LTV. Having a lower LTV is considered good because that is where you’ll usually find the best mortgage rates and have a wide range of mortgages to choose from.
What are LTV bands?
Mortgage lenders tend to split their mortgage products into different LTV bands. The LTV specified for a mortgage deal will be the maximum LTV it will consider for that particular product.
Typically there will be a 5% difference between LTV bands, or sometimes 10%. As an example, you may find a lender offering mortgages at 60% LTV, 70% LTV, 75% LTV, 80% LTV, 85% LTV, 90% LTV and possibly 95% LTV.
It’s possible to move between LTV bands as a mortgage borrower, depending on the fluctuations in the value of your property and the mortgage repayments you make.
What is the lowest LTV mortgage available?
When looking at price comparison sites or mortgage lender websites, the lowest LTV band you’ll generally see offered is 60% LTV. If your LTV is lower than 60%, these are still the deals you need to be looking at, and where you should find the lowest mortgage rates.
Can I get a 100% LTV mortgage?
It may be possible to get a 100% LTV mortgage but as this means you have no deposit these are specialist mortgage deals and much harder to find. Lenders offering 100% mortgages usually require that you have a family member or friend who acts as your guarantor and will step in to make your mortgage repayments if you don’t.
» MORE: What are guarantor mortgages?
Can your LTV change?
Hopefully, your loan-to-value will reduce over time allowing you to take advantage of the lowest mortgage rates which tend to be available at lower LTVs.
This may happen if you have a repayment mortgage where the amount you owe on your original mortgage loan falls as you make regular repayments. At the same time, a rise in the value of your property may also help lower your LTV.
The flip side is that house prices can also fall, with the potential to push you into a higher LTV. This can be a particular risk to first-time buyers who initially borrow at a high LTV of perhaps 90% or 95% LTV and may then see the value of their home fall below the amount that they owe on their mortgage. This is called being in negative equity.
» MORE: Best mortgage lenders
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