Loan to Value, otherwise shorthanded as LTV, is something you should have seen mentioned when looking for that all-important first mortgage for your first home. In the following post, we want to help you understand this term better, discussing exactly what it is and looking at the most important considerations you need to make when considering one.
What does Loan to Value Mean?
First things first, LTV, as we will refer to it from now on, is the loan-to-value ratio in the form of a percentage for a mortgage. If the property you were interested in was on the market for £300,000 and you have savings that amount to £20,000 for the deposit, that works out as 15% of the asking price on the house. This means you would need a mortgage of £170,000 and would have an 85% LTV.
Why is LTV Important?
For one thing, the maximum LTV offered by a financial company has an impact on the total amount you can borrow. If the mortgage company offers you an LTV of 90%, and you are looking at a property on the market for £200,000, it means you can borrow as much as £180,000.
It’s also important to realise the LTV impacts the deals on mortgages you will be offered.
Calculating the LTV is Relatively Easy
Working how much the LTV is for a mortgage is as easy as dividing how much money you can borrow the property value. To display that number as a percentage, you just need to multiply it by 100.
The Most Common LTV Ratios You Will Find
All financial companies who offer mortgages have a limit on the maximum LTV their offer and many of them have a tier system or LTV band that determines how their mortgages are priced. As a rule of thumb, the more deposit you have, the lower the LTV will be and the better the deals you will have access to.
Main Advantages and Disadvantages of Lower Vs Higher LTVs
It’s not always very easy to save a big deposit, and for many interested in buying property, one of the best ways to make those formative steps on the property ladder is by accepting a higher LTV mortgage. Alternatively, though, it’s not uncommon for mortgages with higher LTV to have unappealing interest rates. With that in mind, some people may benefit from longer mortgage terms and a larger deposit.
You will find though, most mortgages with lower LTVs are more affordable than those with higher ratios. What does this mean? You will be able to save a lot more money by taking the lower interest rate mortgage.
Are Higher LTV Mortgages Avoidable?
There are ways you can avoid mortgages with exceptionally high LTVs, such as:
- Saving a larger deposit
- Consider looking and buying properties with considerably lower market prices
What if The Value of the Property Lowers?
While we’ve focused on LTVs from a first-time buyer’s point of view, it’s worth remembering that LTVs are just as important to be aware of when you’ve already bought the property. For instance, they can come into play when you need to remortgage to benefit from a more appropriate deal or when you want to sell the property. Check what your house might be worth online to give you an idea of your current LTV.
In the past, it was followed that paying your mortgage within the agreed term would result in the value of the property increasing.
As there’s been various times when property prices have taken nosedives, because of local and/or national economy issues, the LTV increases.