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Loan to value explained

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If you're looking to get a mortgage, you're going to come across the term LTV. But what does it mean, and how important is it really?

Here we take a look into what LTV is, how to calculate it, and how to get a lower LTV ratio.

A model house balances on a set of scales against a stack of coins

LTV stands for loan to value. It’s the loan value as a percentage of the current property value. If the value of your property changes, so does your LTV which is how equity or negative equity happens. 

For example, if you’ve saved 10% of a house worth £200,000, you’d have a £20,000 deposit. This deposit covers 10% of the actual house value, so you still need to fund the other 90%. This is where LTV comes in.

In this instance, you’d need a 90% LTV mortgage in order to reach the full 100% of that property’s value.

A 90% mortgage would mean that you’ve borrowed the remaining £180,000 from a lender. It’d be this mortgage you’d apply for when looking at lenders.

Lenders look at your LTV as one of the factors to help them decide whether to approve your mortgage or not.

The higher the LTV, the higher the percentage you borrow from the property's price. Unfortunately for the lender, this is a bigger risk.

If you’ve got a 5% or 10% deposit it means you have less equity in the property. This increases the chance that the lender loses out if you can’t keep up with the repayments and you could face reposession of your home.

The lower the LTV, and the larger your deposit, the safer you are seen to be as a borrower.

The other big reason why LTV matters is because the amount you borrow has an interest rate attached to it. So the higher your LTV, the more you pay overall.

You can work out your LTV by dividing your deposit by the value of the property, and multiplying it by 100.

For example:

£20,000 (deposit)/ £200,000 (property value) x 100 = 10%

100% - 10%

LTV = 90%

So in this case you'd need a 90% mortgage.

How to calculate my LTV ratio when I remortgage?

To calculate your LTV when you remortgage, it's just like how you would normally calculate the LTV. But instead, you divide the amount left on your mortgage by the value of your property now.

When you remortage, it's likely that your LTV won't be the same as when you first bought the house. This is because you gradually increase your equity as you continue to make mortgage repayments.

That's unless your property has decreased in value and you're in negative equity, meaning that you owe more than what the house is worth.

A good LTV could be anywhere from 40% to 75%. Generally, the lower the LTV the more likely you are to access better mortgage rates.

Anything from 80% and up means you're going to be paying bigger interest rates on your mortgage.

So if you've got the savings, it's worth putting down a bigger deposit so you can achieve a lower LTV ratio.

Although having a higher LTV doesn't mean you won't get a mortgage as there are still some lenders who are willing to lend the money. And a bigger deposit isn't an affordable option for everyone, sometimes it's best to go in with a higher LTV just to get onto the property ladder.

If you're unsure, speak to an expert advisor at Mojo Mortgages who can tell you how much you can afford and your LTV ratio.

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100% LTV mortgages, also knows as no deposit mortgages, are possible but rare.

Skipton Building Society launched its 100% LTV mortgage in 2023 and is currently the only lender offering this type of deal.

As you can imagine, the criteria for this type of mortgage is strict. You only qualify if you meet its specific standards, such as being a first-time buyer and proving that you've paid rent and bills on time for at least 12 months.

Alternatives similar to 100% mortgages include:

  • Guarantor mortgages - this is when another person, typically a family member, is responsible in making repayments if you can't. Their property is used as security against the loan, meaning if you fail to pay your mortgage their home is at risk.
  • Family offset mortgages - a family member links their savings account to your mortgage. This helps to lower your LTV ratio, reducing the interest you pay.

There are a number of ways to reduce your LTV ratio so you can access lower interest rates on your mortgage:

  • Pay a bigger deposit - a bigger deposit means you borrow less from a lender. This is the best way to reduce your LTV if you're a first-time buyer or remortgaging.
  • Make overpayments on your mortgage - overpaying your mortgage is a good way to pay off your mortgage faster, that way when you need to remortgage you can access better mortgage rates.
  • Invest in home improvements - if you spend the time and money on home renovations, you increase the value of your home. As the value increases, so does your equity. You can then get a professional valuation done to see if your LTV has improved for the next time when you remortgage.

 

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