When exploring mortgage options, you’ll often come across the term Loan-to-Value (LTV). But what does LTV mean? And more importantly, how does it impact your mortgage rates, eligibility and overall costs? In this guide, I’m going to break down the Loan-to-Value ratio, its effect on your mortgage application, and how to achieve the best deal whether you’re a first-time buyer or remortgagor.
What Is Loan-to-Value (LTV)?
Loan-to-Value, or LTV, is a ratio that compares the size of your mortgage loan to the total value of the property you’re buying. Simply put, it’s the percentage of the property’s price you need to borrow versus the deposit you can put down for it.
As an example, if you want to buy a property for £300,000 and have a deposit of £75k (so a quarter of the full value of the property), you could look at a 75/25 LTV.
Just so you know, you can’t use a mortgage to cover stamp duty land tax or your moving costs. See our house moving calculator to get your head around that one.
What Impact Does LTV Have on a Mortgage?
LTV is a crucial factor for lenders, as it helps assess the level of risk they’re taking on by lending to you. A higher LTV means the lender is financing a larger portion of the property’s value, which increases their risk. Here’s how it can impact your mortgage:
1. Interest Rates
- High LTV: If your LTV ratio is 90% or higher, you’ll likely face higher interest rates due to the increased risk lenders take on by financing a larger portion of the property’s value.
- Low LTV: A lower LTV (e.g., 60-75%) typically qualifies you for better mortgage interest rates, saving you money over the life of the mortgage term.
2. Eligibility
Lenders often have strict eligibility criteria for higher LTV mortgages. For instance, a 95% mortgage may require a stronger credit history and proof of stable income compared to an 80% LTV mortgage. A broker would be able to give you some concrete and up to the minute advice. See my post on working with a broker.
3. Negative Equity Risk
With a high LTV, you’re more vulnerable to negative equity—where the outstanding mortgage balance exceeds the property’s market value if house prices fall. This isn’t good, because you never want to owe more on a property than it’s worth, it means if you sell you’ll have to dig into your own pockets to pay off the loan. So just be informed about the risks, take proper advice from a professional don’t go into something too hastily.
What Loan-to-Value Should You Aim For?
While the right LTV depends on your circumstances, here are some general guidelines:
- Below 60%: This is considered a low LTV and offers the most competitive interest rates.
- 60-75%: A good range for buyers with significant deposits, offering a balance between affordability and favorable terms.
- 85-90%: Common for buyers with smaller deposits but can come with higher interest rates.
- 95%: Ideal for first-time buyers with limited savings but higher risks and costs.
See Femme Finance’s guide on What mortgage can I get on my salary? for more information.
If possible, aim for an LTV of 75% or lower. This can help you secure better mortgage rates and mean lower monthly payments. However, visit Unbiased to speak to a mortgage broker to get advice tailored to your personal financial situation.
FAQs About Loan-to-Value
1. Can I get a mortgage with a 95% LTV?
Yes, many lenders offer 95% mortgages, especially under government-backed schemes. However, these usually have higher interest rates.
2. How can I lower my LTV?
You can lower your LTV by:
- Saving a larger deposit.
- Purchasing a lower-priced property.
- Paying off a portion of the mortgage balance (if remortgaging).
3. Does a higher property valuation reduce my LTV?
Yes, if the property is valued higher than expected, your LTV ratio will decrease, potentially qualifying you for better mortgage terms.
4. What happens if my LTV is too high?
If your LTV is too high, lenders may decline your application or offer less favourable terms. You may need to save a larger deposit or improve your financial profile.
5. Are there tools to calculate my LTV?
Yes, online tools like an LTV calculator can help you work out your LTV quickly.
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