What is a Loan-to-value? And why it matters

Summary

What is a Loan-to-value? (LTV). An LTV is term that shows how much you’re borrowing compared to the value or price of a property (like with a mortgage).

Loan-to-value

The outstanding mortgage compared to the property value, expressed as a percentage.

Why it’s used

To show the borrower and the lender how much equity there is in the property.

What effect does it have

Determines which products are available to the borrower when getting a mortgage.

Introduction

When you first get a mortgage, or begin your hunt for one, you may hear your bank or mortgage adviser mention the term ‘loan-to-value’ or LTV for short.

The loan-to-value can play a major role in determining the mortgage products available to you and can even affect which lender you can go with.

So, what is it?

What is a Loan-to-value (LTV)

The loan-to-value (LTV) is the outstanding mortgage balance (loan) compared to the property value, displayed as a percentage.

For example, if your property was valued at £100,000 and you had an outstanding mortgage of £70,000, your LTV would be 70%.

Breakdown:

Loan: £70,000 = 70% of the value: £100,000

Why do we use it?

There are multiple purposes to a loan-to-value, but it’s more for the benefit of the lender rather than the borrower.

Benefit for the lender

It allows the lender to categorise different mortgage products depending on what the LTV is. The higher the loan-to-value, the higher the interest rate on the product. This is because it is seen as more of a risk.

If house prices were to decrease, the borrower could end up owing more than what the property is worth.

Most lenders have loan-to-value caps on property types and applicants. Say if you had a poor credit history, you may only be able to borrow up to an 85% loan-to-value, whereas some first-time buyers with a good credit score may be able to borrow up to 95% to 100% of the property value.

If the property is a flat, new build, or of a different construction, this can also limit the max LTV — such as Virgin Money only offering 80% LTV on new build flats.

Benefit of the borrower

The loan-to-value benefits the borrower by showing them how much equity (cash) they have in the property. A 50% LTV on a £100,000 property would tell them they have £50,000 equity.y.

What affect does it have on borrowing?

When getting a mortgage, your mortgage interest rate is determined by the loan-to-value percentage, as lenders usually set each interest bracket in 5% increments. As mentioned, the higher the LTV, the higher the interest rate.

Example

90% LTV = 5.5%

85% LTV = 5.25%

80% LTV = 5%.

What should I aim for?

When it comes to a target loan-to-value, there isn’t a one-size-fits-all solution. Ideally, you want the lowest possible LTV, as this will offer you the best interest rates. However, as a first-time buyer, you’ll still be fine with a 5% deposit. If you have more, great, put it down. If not, no worries.