Loan to value ratio (LTV) is the size of the mortgage you take out compared to the value of the home you want to buy. When you look for a mortgage, deals will have an LTV that you will need to meet if you want to apply for them.
Why does loan to value matter?
Loan to value ratio can affect the interest rate you are offered.
In short, the more money you can put down as a deposit, the better chance of being offered a lower interest rate.
Paying less interest means you’ll have cheaper monthly repayments and pay back less money overall.
How does loan to value ratio affect a mortgage?
The lower your LTV ratio, the cheaper your mortgage is likely to be. If your loan to value is too high, some lenders might not let you borrow at all.
If you have a lower loan to value, say, 60% and under – lenders may view you as a safer option than someone with a 90% LTV ratio. This is because a low LTV ratio means you will borrow a smaller percentage of the value of the property.
If you have a small deposit, you may have to pay a higher interest rate to offset the risk you pose to the lender.
How to work out your loan to value ratio
Working out your loan to value ratio is simple. Let’s say you want to buy a home worth £200,000 and you have a deposit of £20,000:
Subtract your deposit from the value of the home.
£200,000 minus £20,000 equals £180,000.
So you need to borrow £180,000.
£180,000 is 90% of £200,000. So your loan to value is 90%.
How to improve your loan to value ratio
If you want to improve your loan to value ratio, there’s a few actions you can take:
Save up for longer – A bigger deposit is a way of improving your loan to value ratio.
Buy a cheaper property – As your loan to value is based on the value of the home you want to buy, going for a cheaper property will bring it down.