What LTV Means for a Mortgage
LTV stands for loan-to-value. It represents the relationship between the size of a mortgage and a property’s value, and it determines how much your deposit needs to be when you buy a house.
There are all sorts of important factors to take into consideration when choosing a mortgage, including the interest rate and any product fees that you will have to pay.
One of the most crucial elements of any mortgage is the LTV because of the effects it can have on your rate and monthly repayments. But what does LTV mean and why is it important?
What is LTV?
LTV stands for loan-to-value, and it details how the size of your mortgage compares to the value of the property you are borrowing against. When you know the LTV for a mortgage you are considering, you will be able to work out how much you need to put down as a house deposit.
So for example if you are buying a property for £200,000 and take out a mortgage for £180,000, then you will have a 90% LTV mortgage. You will then need to produce a deposit for the remaining 10%, or £20,000, in order to complete the purchase.
When lenders design their various mortgages, it will detail the maximum LTV it will consider for that particular product.
How does LTV affect your mortgage?
The LTV is a big factor in how lenders price their various mortgage deals. They will offer products at different LTV tiers, with the interest rates charged increasing as you move up the tiers.
For example, lenders tend to offer their best rates on products that are available up to a maximum of 60% LTV, meaning a borrower needs to put down a deposit worth at least 40%. They may then offer different rates at LTVs of 65%, 70%, 75%, 80%, 85%, 90% and even 95%.
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. The chance of the lender losing money should the property fall in value is greater and, as a result, these deals will be more expensive.
The LTV doesn’t just affect the pricing of the mortgage though ‒ it will also make a difference to the level of choice open to you.
Because of the perceived level of risk, if you have only a 5% or 10% deposit then you are likely to have fewer mortgages to choose from. In contrast, if you have a significant deposit, then you are likely to have a much wider selection of mortgages available to you.
» MORE: Compare mortgages
How do I calculate the LTV?
Working out what the LTV will be of any mortgage you need to take out is a crucial part of the homebuying process.
Firstly, subtract the size of your deposit from what you will be paying for the property. This tells you the size of the mortgage you will need to take out. Divide the size of the mortgage by the value of the property and then multiply by 100 to calculate the LTV.
The process is much the same when you need to remortgage. You can get an idea of how the value of your property may have changed since you took out your last mortgage by checking what similar properties in your area have sold for recently on the Land Registry website.
Certain property portals, like Zoopla, will also use the data gained from local property sales to give you a rough idea of what your home may now be worth, which you can use to calculate the LTV.
How will the LTV change over time?
You may purchase your home with an initial 10% deposit and a 90% LTV mortgage, but when the time comes to remortgage a few years later, the mortgage you take out will likely be at a different LTV.
There are a couple of different drivers behind this. The first is that over time the size of your loan will inevitably fall as a result of your regular repayments, and as a result the LTV of your remortgage will be smaller, potentially dropping you into a cheaper LTV tier.
But house prices don’t remain static either. If your house has increased in value, then this will also help to reduce the LTV when you come to remortgage.
However, house prices can fall too, which can raise the possibility of dropping into negative equity.
What is negative equity?
Negative equity is when the outstanding mortgage is worth more than the property it has been taken out against. This can happen when house prices fall.
So in the example above, let’s say that a couple of years on from the purchase the property ‒ which was purchased for £200,000 ‒ is now worth £170,000 but the borrower still owes £175,000 on the mortgage. The property would now be in negative equity by £5000.
This will present a problem if you want to remortgage as lenders will not currently lend above 95% LTV. As a result you will not be able to move to a new mortgage deal unless the mortgage balance falls further or the value of your property increases.
John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more