Mortgage Loan To Value
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Are you looking to remortgage or buy a new home and have heard the term loan to value used? Have you been asked what is your LTV ratio? Carry on reading as we will not only answer these questions but also give some hot tips on how getting it right could save you a significant amount of money.
As a fee-free mortgage broker, there is no charge for the services that we can offer. So, get in touch with us today for more information about the loan to value mortgages that could be open to you.
What Is A Loan To Value Mortgage?
When you take out a loan, the mortgage lender will refer to the ratio, which is also known as the ‘loan to value.’
A loan to value (LTV) mortgage is the size of the loan relative to the total value of the property. In mortgage terms, it is always expressed as a percentage are referred to as ltv ratio.
So, if you were looking to buy a home worth £200,000 and borrowed £180, 000, the LTV would be 90%. This is because you would be borrowing 90% of the value of the property. You would then provide the remaining 20,000 (10%) as a deposit. In this instance, your mortgage would be known as a 90% LTV mortgage.
Why Morgage Lenders Care About LTV
The loan to value ratio is what lenders use to determine the level of risk they are taking when giving somebody a secured loan.
So, if you could only afford to put down a small percentage of the property upfront, you wouldn’t be considered as safe a bet as somebody who could put down more. This would have an effect on the interest rate the banks and building societies would charge you.
You would be charged more interest for a 90% LTV mortgage than an 80% LTV, for example, as this would offset some of the losses the bank or building society might make in the event the value of the property went down and you didn’t keep up your repayments.
If you were able to put down a higher deposit, you would be eligible for a lower LTV mortgage. For these loans, you would usually be given a preferential interest rate as you would pose a lower level of risk to the mortgage lender.
How to calculate loan to value
To calculate LTV, you simply need to take the amount you need to borrow, divide it by the property value and multiply the result by 100 to get the percentage value.What does 80% LTV mean?
So for our real-life example, let’s take the calculation above and relate it to an 80% LTV mortgage.
If the property value was £300,000 and you had £60,000 to use as a deposit, you would need a loan of £240,000. To calculate the LTV, you would work it out as follows:
240,000 ÷ 300,000 x 100 = 80
In short, you would be eligible for an 80% LTV. In other words, the bank would be willing to lend you 80% of the purchase price of the home. The remaining 20% would be paid yourself as a deposit towards your property purchase.
What Is A Good Loan To Value Ratio?
Generally speaking, a good loan to value ratio is 80%. This is because a lender will usually expect the borrower to put down at least 20% of the home’s value as a down payment. You can expect lower interest charges with this LTV ratio than you would with a 90% or 95% loan to value LTV.
Of course, if you could pay more than 20% upfront, you would benefit from lower interest payments on your mortgage balance. This is because you would be eligible for a mortgage at a lower value LTV ratio, such as a 60% LTV if you were able to put down 40% of the property value.
Not only would you qualify for a better mortgage rate if you had a lower LTV, but you would have a wider choice of mortgages to choose from too. This is because banks and building societies will consider you less likely to default on your mortgage than somebody who wanted to put down a smaller deposit. So, if your LTV was 75%, you would qualify for a wider range of deals at lower rates and products than somebody with a 90% LTV, for example.
Wondering what the loan to value would be for a second mortgage?
How Does Loan-to-Value Ratio Affect Interest Rates?
Mortgage lenders will often price their mortgages in LTV bands.
Typically, the higher the band the higher the interest rate the bank or building society will charge the buyer. Conversely, if the mortgage ratio is in a lower LTV band, the buyer will incur a lower interest rate.
This might seem unfair for somebody unable to make a larger deposit but, as we suggested earlier, it is to offset the risk to the bank or building society.
Should house prices fall, there is the risk that the property value would become less than the amount of the mortgage and fall into negative equity.
If the lender needed to recover mortgage debt by selling the property, they would stand to lose more money on a mortgage with a higher loan to value ratio. A house bought with a 90% LTV ratio mortgage, for example, would only need a 10% drop in the house price before it went into negative equity. This is why higher interest is charged to minimise the financial risk to the lender.
How to lower your loan to value
There are two ways to lower the loan to value LTV ratio.
The first is to save up more money. The more you can pay upfront, the lower the Loan to value LTV ratio would be. You would then have lower interest rates to pay on your mortgage which is good news, as the money you save could go on home improvements and anything else you wanted to spend your money on. You would also be able to choose from a wider range of mortgages, at cheaper prices than those offered to buyers with lower deposits.
The second option is to find a cheaper home. We know this can be crushing to hear, especially if you have your sights on the home of your dreams. But if that property requires a higher loan amount, you can expect to pay more in interest rates, which is not ideal when you’re trying to save money.
The bottom line is this: Consider options that don’t leave you financially stretched. With a lower LTV, you would have less interest to pay and a potentially shorter mortgage term, so you would be financially better off. Saving up for a higher deposit or purchasing a cheaper property is often better than paying a lower deposit and risking monthly repayments that could cause you to struggle financially.
High Loan To Value Mortgages
If you’re unable to put down a higher deposit, then you may be eligible for a high LTV mortgage. As we discussed, these aren’t always ideal. But if you’re in a hurry to get on the property ladder and you can’t afford to pay more upfront, then you should find a lender that is willing to offer you a 95% or 90% mortgage deal.
In the past, lenders used to offer homebuyers higher LTV mortgages, with LTV ratios of 100% and even 125%. These are no longer available as banks and building societies consider them to be too high a risk, but there are still a wide number of bank or building societies that offer the high LTV mortgages below.
95% mortgages
With a 95% LTV mortgage, you can borrow 95% of the value of your home. This means you only need to put down a 5% deposit.
During the recent pandemic, banks and building societies were quite cautious about offering deals above 90%. This is why people have struggled to get such a mortgage over the last couple of years. However, the government launched the mortgage guarantee scheme in April 2021. This has given lenders more confidence to offer 95% mortgages again, as any losses they stand to make should a borrower fall behind on their repayments will partially be covered by the scheme.
While a mortgage with this high LTV ratio is attractive to homebuyers because of the smaller deposit amount, it is still important to remember the downsides.
The interest rate will be higher and consequently so will the monthly repayments. There is also the risk of negative equity if the price of the property goes down. As mentioned, this is when the size of the mortgage becomes greater than the value of the property. Problems might then occur if you want to sell the property or remortgage.
While we don’t want to sway you from getting a 95% mortgage deal if that is what you can afford, we do need to remind you of the risks.
If you think this type of mortgage deal is best for you, talk to our team of mortgage advisers today for advice as well as some insights on who can offer this higher LTV ratio.
90% mortgages
With a 90% loan to value mortgage, you can secure a property with a 10% deposit. So, if you were to buy a property that was worth £200,000, you would need to cover the remaining £20,000 with your savings.
A 90% mortgage is attractive to those looking to get on the property ladder and is better value than a 95% mortgage. However, there is still the possibility of higher interest rates than a mortgage deal with a lower LTV ratio, as well as the other risks that can also be associated with a 95% mortgage. Talk to us today to find out what mortgage rates and products might to available to you.
Buy To Let Mortgage Loan To Value
If you’re looking to buy a property that you want to let out, the highest LTV you can expect is 75%, subject to criteria. A few banks and building societies offer 80% LTV mortgages however the products on these loans will be higher.
Banks and building societies consider buy-to-let properties to be a slightly higher risk. This is because the borrower’s ability to make repayments is sometimes dependant on the income they bring in from tenants. Should the property be empty for a while, the borrower might struggle to keep up with their repayment plan. This is what lenders will be taking into consideration anyway.
Check out our guide on buy-to-let mortgages and get in touch with us for advice on the mortgage deals available to you.
Frequently Asked Mortgage Questions
Can your credit score affect your loan to value?
Credit scores are a key ingredient in how much you will be able to borrow. A bad credit score will affect the mortgage deals you will be offered but that doesn’t mean getting a mortgage will be impossible.
If you don’t have a good credit score, you will have more success getting a mortgage if you can put down a larger deposit for a low LTV. This minimises the risk factor for the bank.
If you have loans or a credit card or two, paying these off or reducing the amount outstanding can result in improving your credit score. The better your credit score and ltv ratio the better the mortgage rates and products on your repayment mortgage loan.
It can still be possible to get a high LTV with a bad credit score but through specialist lenders rather than the mainstream banks and building societies, you will usually find on your high street.
At YesCanDo Money mortgage brokers we have access to those specialist lenders that offer mortgage deals to those with a bad credit score.
Is 70% a good LTV?
Yes! With a 70% LTV, you will have a wide range of competitive options to choose from. This is at the lower end of LTV bands so is less of a risk for lenders. Consequently, you will have less monthly interest to pay as a deposit of 30% will be rewarded by the bank or building society.
Can I get a mortgage for 4.5 times my salary?
It used to be a good way to calculate how much you could borrow. It is deffinitly possible to borrow 4.5 times the salary of all mortgage applicants. This would be more likely if you have no to little debt and an average or higher than avergage UK salary.
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