How loan to value (LTV) ratio affects your mortgage

‘Loan to value’ ratio means ‘How much of your property’s total price is being paid for by your mortgage?’ It’s a very important figure for homebuyers and remortgagers alike, as it can have a huge impact on your borrowing power and on the overall cost of your mortgage. Broadly speaking, a low loan-to-value ratio is good, and a high ratio is less desirable.

Use our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be.

Here’s our guide to understanding loan-to-value ratio, and what it means for you in practice.

What is loan to value (LTV) ratio?

When you look at taking out a mortgage, you’ll find lenders and brokers referring to a ratio called loan to value (LTV). This means the size of the loan relative to the property’s total value, and is often expressed as a percentage (e.g. ‘an 80 per cent mortgage’).

LTV ratio is one of the most important factors in the mortgage process. Lenders want assurance that they will not lose money by lending to you, even if you fail to keep up repayments. If you can’t repay your mortgage, then lenders always have the option of repossessing your house and selling it to recoup the value of the loan.

However, if property prices fall, there is a risk that the sale of the property won’t cover the outstanding balance. For this reason, a high LTV makes lenders jumpy: a home bought with a 90 per cent mortgage would only have to lose 11 per cent of its value to go into ‘negative equity’, where the sale price wouldn’t cover the balance on the mortgage.

This means that lenders will insist on tougher terms if you have a high LTV ratio – which means higher interest rates and perhaps higher fees too. Conversely, they much prefer lending to people with a low LTV (e.g. a 70 per cent mortgage) as this poses a much lower risk that they’ll lose money. Consequently, they’ll offer the most attractive mortgage deals to these low LTV customers.

In short, if you have a lower LTV, you’ll have lower interest payments and will end up paying less for your property overall.

How do I calculate my loan to value ratio?

If you are preparing to buy your first home, a key element will be the size of your deposit, i.e. the cash lump sum you have saved up to use alongside the mortgage. Once you know this, you can calculate your LTV ratio. Subtract your deposit from the total value of the property, and the result is the size of the mortgage loan you will need. Your LTV ratio is your mortgage expressed as a percentage of the total property value.

For example, if you have saved up a £20,000 deposit and you are buying a £200,000 house, your deposit is 10 per cent of the total value. Your mortgage will have to cover the remaining 90 per cent, so your LTV ratio would be 90 per cent.

What are the loan to value bands?

The table below shows you how interest rates relate to LTV ratios and directly affect the cost of your mortgage. These examples apply to a house with a value of £200,000 on a typical two-year fixed-rate mortgage: 

Your LTV ratio will change over time, both as you pay off more of the loan and as the value of your property changes. Keep an eye on changes in the property market and the impact on your LTV ratio, especially if you choose to remortgage.

What is a good loan to value ratio in the UK?

Unsurprisingly, first-time buyers tend to have a higher LTV ratio, so their monthly payments are higher than those moving from one house to another. The average ratio for first-time buyers is 82 per cent, compared to 74 per cent for home movers.

However, it’s not true to say that most first-time buyers have a high LTV ratio. In fact, the average deposit for first-time buyers is around £43,400 on an average property price of £217,000. This is a ratio of 80 per cent. From 2016-2018, first-time buyers paid an average of £760 a month, compared to £681 for those remortgaging.

What is the maximum LTV a mortgage lender will allow?

It is possible to get a 100 per cent mortgage under certain circumstances, meaning you are borrowing the entire property value from the lender, and don’t need a deposit. However, such deals come with important conditions and caveats.

The vast majority of 100 per cent mortgages require guarantors (e.g. the buyer’s parents) who are willing to take responsibility for the loan if the buyer can’t keep up repayments. Typically, the guarantors’ own home might be used as collateral (if the sale of the property being bought does not cover the outstanding mortgage). Additional mortgage insurance might also be necessary.

A mortgage broker can help you find these 100 per cent deals and decide whether they are suitable for you. Read up on mortgage broker fees.

Which loan to value ratio should I go for?

With LTV ratio, a good rule of thumb is ‘as low as you can go’. The bigger your deposit in relation to your property value, the better mortgage deals you will be offered, the lower your repayments will be, and the less money you’ll repay overall. It’s sad but true: the more money you have to buy a property, the less you need.

On the other hand, there can be some advantages to buying with a smaller deposit (and thus a higher LTV ratio). For one thing, you should be able to buy sooner, get on the property ladder, save on rent and benefit from any increases in house prices. The longer you wait, the more house prices may rise out of reach – unless you can save at a faster rate.

As with many things, it’s a balancing act. What you may be able to do is buy with a high LTV ratio and then try to reduce it step by step every time you remortgage. Remember that you may benefit from more income in the future (such as from pay rises, gifts or inheritances) so your first mortgage is only your first step.

What happens to my LTV if the value of my house drops?

The value of your property is likely to change over time as the economy expands and contracts. If the value of your property falls sharply, your LTV is likely to increase. And if it falls particularly sharply or quickly, you could end up in what is called ‘negative equity’. This means you owe the lender more than the current property value.

For example, if you buy a £200,000 property at a 90 per cent LTV ratio, you owe the lender £180,000. But if six months after buying the property its value falls to £150,000 (e.g. as a result of market conditions), you will owe the lender more than the property is actually worth.

This could create problems if you need to sell the property or remortgage.

How does my LTV ratio affect remortgaging?

Just as when you first buy a home, your LTV ratio will affect the choice and quality of the mortgage deals you will be offered. However, this time some additional factors are involved: how much of your mortgage you have already paid off, and how much your home has risen in value.

If you have been paying off your loan for a while, and your home has also gone up in price, then your LTV will be lower than it was when you first took out your mortgage. This means that better deals may now be available, with lower interest rates. Alternatively, you may be able to keep similar interest rates but borrow more money against your equity (for example for home improvements, to further boost the value of your home). Remortgaging therefore tends to be easier in a rising property market – less so if prices are falling.

Ask your mortgage broker if you can get a better deal from your improved LTV ratio.

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