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Loan to value explained

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

What is loan-to-value (LTV) and what does it mean for buying a house?

What is LTV?

You’ve probably seen the term LTV when looking into mortgages, or seen it mentioned in articles or online any time house prices, or mortgages are mentioned.  But what is it and what does it mean for you?

LTV stands for loan-to-value.  It’s a percentage that represents the amount you’ve borrowed from a lender to buy a property. 

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How does LTV work?

When buying a property, you need a deposit. A 10% deposit is usually thought of as the standard amount to aim for. But you can save anywhere from 5% to 20%, depending on your circumstances. 

In this example we’ll say you’ve got a 10% deposit:

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. 

Why does LTV matter? 

LTV matters for two main reasons. 

First, the higher the LTV, the more you need to borrow to buy the property you’re after. 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 risk that the lender loses out if you can’t keep up with the repayments.

The larger the deposit you have, the safer you are seen to be as a borrower.

The other big reason why LTV matters is because the amount you borrowed has an interest rate attached to it.

And this rate means you’ll be paying back more than you originally borrowed. So the more you borrow, the higher your LTV, the more you pay overall. Want to avoid this?

How to work out/calculate my LTV percentage?

You can work out your LTV with this:

Loan to value (%) = 100% - (Deposit saved (£) / value of property (£))

Using the earlier example:

LTV = 100% - (£20,000 / £200,000)

LTV = 100% - 10%

LTV = 90%

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

How much should I save for my property?

When it comes to saving for a property, a larger deposit tends to have more advantages than a smaller one:

  • You’ll could be seen as less risky in the eyes of the lender when it comes to applying for mortgages

  • You’ll need to borrow less, so your mortgage won’t be as high. This could translate into lower monthly repayments

  • It shows you can save, so could increase your chances of being accepted for the mortgage.

At the end of the day, it depends on your financial situation. There’s a range of LTV options and tips on saving for a deposit  to help you get on the property ladder.