LTV Explained

What is LTV?

Loan to value (LTV) is the difference between the amount you’re borrowing and the value of the property or asset you’re using to secure the loan. It’s one of the main aspects banks and lenders will look at to help them decide what rate you should be charged at on your mortgage. They will also look at your income and check your affordability to ensure that you can definitely pay them back.

Lenders may also look at your deposit, the price of the property, and how much you’re looking to borrow. This is where the LTV comes in. LTV is expressed as a percentage, and it allows lenders to calculate the risk that they’re taking by lending to you.

How does LTV work?

Let’s say you have a mortgage of £180,000 on a house worth £200,000. In this scenario, the amount you borrow would be 90%, and the remaining 10% would be your £20,000 deposit. This means the LTV of this mortgage would be 90%. So, the bigger your deposit, the less you will have to borrow. Basically, a low LTV ratio is more desirable. Lower LTV means lower interest payments, a lower mortgage and a lower risk for the lender.

First time buyers usually have a higher LTV ratio, meaning their monthly repayments are higher. The average LTV in the UK for first time buyers is 82%. This is because they haven’t yet built up any equity or savings. Whereas people who are moving home, tend to have an average LTV of 75%. 

The reason LTV is so important

Generally, lenders will see borrowers that require higher LTVs as a higher risk. This is due partly to the borrower’s affordability. If they can only afford to purchase a small percentage of the property, they will seem a higher risk compared to someone who can put down a bigger deposit, and borrow less. 

Another reason for that is in the case of repossessing the property. If the borrower ends up not paying off their mortgage, their property will get repossessed. The lender would then have to re-sell in order to earn back what they have lost. This can be tough in a high LTV scenario especially if the property is in poor condition or needs to be sold at auction.

The highest LTV available

Not every lender will do this, but some lenders can offer a 100% mortgage under certain circumstances. Yes! This means you do not need a deposit and can borrow the entire property value. Unfortunately, this is rare. The criteria is very strict, and you may need a trustworthy guarantor that is willing to take the huge responsibility of making your mortgage repayments if you don’t. Therefore, unless you can pass the strict rules, 100% mortgages are very unlikely. 

Improving your LTV

There are a few ways you could potentially improve your LTV

• Wait until you’ve saved up for a bigger deposit. Bigger deposit = lower monthly repayments. Sometimes it’s worth waiting a little longer.
• Find ways that could help you improve your property’s value. Homes gain value quite quickly in the recent property market. If you can increase the value of your home, you are more than likely decreasing your LTV. However that doesn’t help you buy it
• Make an offer to the seller when buying the property. You can negotiate, and try to bring the sale price down. As an alternative, you could just search for a cheaper house so your deposit goes further and you borrow less.
• Keep repaying your mortgage or make over payments. You own more and more of your home with every payment. As a result, your equity increases and LTV drops.

How much should I ideally save for my deposit?

Saving for a house deposit is not easy, but it’s a big step into owning your own home. The lowest deposit you may need is 5% of the property’s value. However, in 2022, most lenders and banks will look for a 10% deposit for first time buyers. In the UK, the average house price is estimated at an average of £270,000 (£514,000 in London). 

Remember: house prices vary in different parts of the country.

Example

If you are buying a property worth £250,000 you may need:

• 5% deposit – £12,500
• 10% deposit (what most banks will prefer) – £25,000
• 15% deposit – £37,500
• 25% deposit – £62,500

Of course, the bigger your deposit, the better. Heftier deposits have a lot more advantages, and you are a lot more likely to find a better mortgage deal, with lower interest rates.

Talk to a Promise Money adviser for more details

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