What does ‘LTV’ mean?
LTV stands for loan-to-value and, put simply, it’s the size of your mortgage in relation to the value of the property you want to purchase. It is given as a percentage.
So if, for example, you have a mortgage of £300,000 and you’re buying a property that costs £400,000, your LTV would be 75%.
This means that 75% of the property’s value is paid for by your mortgage and 25% is paid for out of your own money (your deposit).
How do I calculate my LTV?
The best way to work out your LTV is to divide your mortgage amount by the value of the property and multiply that number by 100.
Let’s say you buy a property worth £200,000 and your mortgage amount is £170,000:
£170,000 / £200,000 = 0.85
0.85 X 100 = 85%
So your LTV is 85%, and your deposit is 15% (or £30,000).
Why does it matter?
The higher your LTV, the riskier it is for the lender offering you a mortgage.
In the eyes of a lender, the less equity you have in your home, the more likely you are to default on your mortgage. And if your property was sold as a result, the lender is more likely to make a loss.
This is because the value of the property could fall below the price you originally paid for it, and if you’ve taken out a large mortgage, the mortgage amount could end up being higher than the property’s value.
For example, if you had a £180,000 mortgage on a £200,000 property and the value of that property fell to £170,000, your lender would lose out.
What does this mean when applying for a mortgage?
If you have a high LTV (and therefore a small deposit),the mortgage rates available to you will be far less competitive.
The larger your deposit (and the lower your LTV), the better your mortgage rate will be.
The very best mortgage rates are available to those with an LTV of around 60%, which means a deposit of 40%.
How can I avoid a high LTV?
The simplest answer is to save as much as you can towards your deposit. This may mean waiting a little longer before you buy your first home.
The more money you can put down as a deposit, the lower your LTV will be and the better the mortgage rate.
Another way to lower your LTV is to look at properties that have a lower asking price as this will reduce the size of your mortgage.
Using the example previously, if you had a deposit of £30,000, opting for a property worth £120,000 rather than £200,000 would mean your mortgage amount would be £90,000 rather than £170,000 and your LTV would be 75% (deposit 25%), rather than 85%.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.