Loan to value (LTV) is all about how much your mortgage borrowing is in relation to how much your property is worth. It's a percentage figure that reflects the proportion of your property that is mortgaged, and the amount that is yours (the amount you own is usually called your equity).
For example, if you have a mortgage of £150,000 on a house that's worth £200,000, you have a loan-to-value of 75% – therefore you have £50,000 as equity. Loan-to-value becomes a key consideration when you come to buy or sell your property, remortgage or release equity.
Your LTV is calculated by dividing the value of the mortgage you need by the value of your property (or the one you want to buy). For example, if you want to buy a house with a value of £250,000 and you have a deposit or equity of £100,000, then you will need a mortgage of £150,000. Here is the LTV calculation:
£150,000 / £250,000 = 0.6
0.6 x 100 = 60
LTV = 60%.
Most mortgage lenders price their mortgages in LTV bands, and this allows them to offer lower mortgage rates for lower LTV mortgages. They do this because a lower LTV means there is more equity in the property. Should house prices fall, there is the risk that the value of the property is less than the amount of the mortgage. If the lender needs to recover the mortgage debt by selling the property, they prefer to be more certain they can recover the full debt. For example, at 60% LTV, house prices have to drop by 40% before the lender will lose money compared to 90%, where a 10% drop would result in negative equity.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
Keeping your loan-to-value as low as possible is key – particularly if you're approaching the point where you need to remortgage. There are two ways you can influence your loan-to-value:
The smaller mortgage you have, the better. If you are on a repayment mortgage you will be reducing your mortgage balance with your payments, and could reduce your LTV in the process. You can even accelerate the repayment of your mortgage by overpaying (providing your mortgage lender allows this and subject to any conditions or limits), which could put you into a lower LTV band quicker and could potentially help you clear the loan sooner. However, if you've got an interest-only mortgage, remember that you're only covering the interest and that the balance stays the same. this leaves you more exposed if house prices go down and your LTV won't change.
By keeping your house 'in order' (well decorated, maintained, etc.) you will minimise any loss of value if house prices go down. You can even increase your property's value by carrying out home improvements like replacing the windows and doors with uPVC, upgrading the kitchen or bathroom and adding things like an en-suite. These may well increase the value of your property and give you a bigger equity in the process. This could, in turn, help lower your LTV when it's time to remortgage.
A high LTV, for example above 75%, is usually more expensive than a lower LTV. You can nearly always get a better mortgage rate with a lower LTV. The lowest LTV band is usually 60% – at this point, most lenders do not reduce their rates any further for lower LTVs.
There is no definitive good LTV, and unlike a credit score, it is not connected to your creditworthiness or a score that decides if a lender will give you a mortgage. LTV allows lenders to price their mortgages based on how much equity is in the home at the point you purchase or remortgage.
This is important because lenders rely on the fact that should you default on your mortgage, they can sell the property to recover their debt and costs. If you have very little equity in your home, meaning you have a high LTV, then it would only take a small reduction in house prices to result in negative equity and a potential loss for the lender.
In the UK, the maximum LTV without the help of a family member or guarantor mortgage is typically 95% LTV, but might vary from time to time.
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