What is loan to value?
If you have ever thought about applying for a mortgage, you will likely have come across the term loan to value or ‘LTV’. This is a term that is commonly used, but buyers don’t necessarily know exactly what this means and can be left wondering ‘what is loan to value?’.
In this guide, we discuss what loan to value is in relation to mortgages and how you can find the best LTV mortgages available for your purchase.
In this section (what is loan to value?):
- Loan to value explained
- What is a good loan to value ratio UK?
- Best loan to value ratio for mortgage
- What is maximum loan to value?
- Is there an average loan to value ratio?
- First time buyer loan to value
- How to work out loan to value mortgage
- Get a better loan to value ratio for your mortgage
Loan to value explained
Loan to value ratio refers to the amount you are borrowing for your mortgage compared to your deposit amount. The amount you provide for your deposit equals the amount of value or ‘equity’ you own in your property and this amount will increase over time as you repay your mortgage.
If you were getting a mortgage for a property worth £150,000 for example and putting down a £15,000 deposit (10% of the property value), this would be referred to as a 90% loan to value mortgage. This is because the lender will be providing 90% of the capital needed to buy the property.
The loan to value ratios available can vary depending on the type of mortgage you need and property value, the amount of deposit saved and even the specific lender you are applying to.
What is a good loan to value ratio UK?
You loan to value percentage can vary hugely depending on the type of mortgage you need, the property you wish to buy and your budget. Ideally, you want your loan to value to be as low as possible (80% or less).
Generally, the larger the deposit you can provide the better, as this means you will have less to repay. Mortgage lenders will also look upon you more favourably and some will even offer better interest rates.
Some mortgage types will require larger deposits due to higher risk for lending, for example buy to let mortgages.
A buy to let mortgage will on average require a deposit that is worth at minimum 25% of the overall property value, compared to the standard requirement of 10%. A 25% deposit would mean your mortgage would be 75% LTV.
Best loan to value ratio for mortgage
The ‘best’ loan to value ratio available to you will be dependent on the type of mortgage you need, as well as the lender you apply to.
The lower the loan to value you can afford to begin with the better, as this can lead to a wider range of deals you can get. It can be very beneficial to save a higher amount for your deposit, and can mean better interest rates and less to repay overall.
As you repay your mortgage, the LTV will reduce in line with your mortgage balance, as you own more equity in your property and have less capital left to repay.
Some lenders may be willing to offer up to 95% LTV but this will only be under specific circumstances and often these mortgages will be reserved exclusively for first time buyers.
What is maximum loan to value?
95% loan to value will usually be the highest possible LTV available with most lenders, it can however be possible to get 100% loan to value mortgages with the right advice and support.
This is a mortgage where there is no deposit required and the lender provides the full amount needed to buy the property.
Usually this will only be available with guarantor mortgages, where another person (generally a parent or guardian) has agreed to cover repayments if you are unable to or has put their own property down as collateral.
A 100% loan to value mortgage is rare though, as lenders will be more hesitant to approve a mortgage loan where the borrower cannot provide any deposit at all. Mortgage providers will deem you a much higher lending risk if you are not investing any of your own funds, which is why these mortgages will not be as easily available.
If you want a high LTV ratio (90%-100% LTV) for your mortgage, you can also expect to pay higher interest rates.
Is there an average loan to value ratio?
The typical loan to value percentage that is widely available for residential mortgages will be 90% LTV.
This means you will need to provide the lender with a 10% deposit to prove financial responsibility and ability to save and budget. They will then provide the further 90% of the loan amount you need to purchase the property.
First time buyer loan to value
When you buy a home for the first time, it is can be very exciting and first-time buyers have an advantage when it comes to loan to value percentages.
There are government support schemes designed specifically to help get people on the property ladder for the first time, even if house prices are rising. The mortgage guarantee scheme allows first time buyers to get a mortgage with only a 5% deposit needed, equalling 95% loan to value.
First time buyers may have more limited funds and with no property to use as equity a lower deposit requirement can be extremely helpful.
We have helped many first-time buyers find the right mortgage for their budget, comparing hundreds of available deals across over 50 of the UK’s top mortgage providers.
How to work out loan to value mortgage
To work out your loan to value amount, look at the cost of the property you want to purchase and how much you have saved for your deposit or equity you have in your property (remortgage).
In a simple example, say you need to borrow £100,000 and you have saved £10,000.
Take away your deposit amount from the property value and you get £90,000. You divide this number by the property value/purchase price (£90,000 divided by £100,000) which equals 0.9 meaning the loan to value is 90%.
In a more complicated case, you need £175,000 and have saved £20,000. The process for calculating your LTV amount is the same.
Get a better loan to value ratio for your mortgage
There are several things you can do that will equal a better loan to value ratio for your mortgage or remortgage deal.
- Saving a larger deposit means you immediately own more equity in the property, and your loan to value percentage will be lower
- Renovating or improving your property will increase its value, meaning it is worth more than you originally paid and this will add to the equity you own.
- Buying a lower priced home means you will have less to repay for the same deposit amount
- Make overpayments if your mortgage provider will allow this, as doing this will reduce the LTV more quickly
- If remortgaging, your loan to value ratio should be lower as you will own more of the property the longer you have been making repayments
It is possible to save thousands on your mortgage repayments with a lower LTV ratio, so it is worth considering all the above options to reduce this percentage.
Our highly trained and experienced advisors can help you compare hundreds of mortgage rates that the UK’s top providers are offering. We will search tirelessly to find you the best deal, no matter what LTV percentage you can afford.