What does Loan to Value (LTV) mean?
The more cash you put up as a deposit to secure a home, the likelier you’ll get your mortgage approved and the less of a debt you’ll have – which is good news to everyone.
Your Loan to Value (LTV) ratio dictates the mortgage rate you’ll be taking on. Here’s everything you need to know about LTV.
Debt proportions made easy
LTV is the size of the loan you’re asking for, relative to what the property is worth.
We might imagine a home on sale that’s valued at £300,000 for example. If you manage to pay £60,000 for a deposit – which goes towards the full amount – then the LTV is set at 80%, because you’ve covered 20% of the house’s value straight away. This means that the mortgage will be £240,000.
A lender will either nod or shake their head at that proposition. When you’re in the application stage, they’ll also do various checks to see whether you can afford the loan, based on things like your lifestyle and ability to repay previous debts.
How LTV affects interest rates
The higher percentage you’re asking for, the more of a risk you are to lenders.
Added risk means added interest. Mortgage deals are largely formed by their LTV status. Low LTVs are one of the ways to boost your chances of approval, and get a favourable rate.
Typical agreements range from 60% to 95% LTV. While a small deposit might seem like a good idea, it’s likely that you’ll pay more in the grand scheme of things.
To give you an idea of how that can stack up, a 90% LTV may charge 4.5% interest over 25 years, whereas an 80% or 70% deal could ask for 3.5%. In the first case, you’ll be paying more each month for the higher loan you’re taking out, as well as the bigger interest demand.
While all the different types of mortgages are available for various LTVs – such as standard variable rates and trackers, which change over time – you may find it tougher to get a fixed rate mortgage approved when the LTV is pretty steep.
Our mortgage calculator can help you understand how much you could borrow with the deposit you have, or plan on having. What’s more, we’ll show you live deals you could be eligible for in an instant. Click here to get started.