Loan-to-value: what is it, and why is it important to your mortgage?

loan to value

"Loan-to-value" (LTV) is a phrase often bandied around when you’re looking to get a mortgage. However, many people don’t know what LTV means, or even why it’s important to you.

Here’s an easy explanation of loan-to-value, and why it could be important to you when applying for a mortgage.

Loan-to-value is the ratio of your mortgage against the value of the property

Simply put, loan-to-value (LTV) is the relationship between the value of the property and the loan amount you need to purchase it. It is almost always expressed as a percentage.

Imagine you want to purchase your first home. The house is worth £100,000 and you’ve saved £20,000 for a deposit. To purchase the house, you’ll therefore need a loan of £80,000.  Therefore, your LTV is 80%, as £80,000 is 80% of £100,000.

To work out the percentage for more complicated sums, divide the mortgage by the total value of the house, and then times it by 100. 

For example, if the property was worth £300,000 and you have a mortgage of £180,000, the calculation is:

180,000 ÷ 300,000 = 0.6. 

0.6 x 100 = 60. Therefore, your mortgage is at 60% LTV.

LTV determines risk for lenders

Mortgage lenders use LTV, essentially, to determine how much risk they’re taking on. 

The higher the LTV, the greater the risk for the lender. If the lender approves a mortgage at 95% LTV and the property price falls by 6%, they could lose money. This is because the outstanding loan is now more than the value of the property. 

So, if you fail to make repayments and the lender is forced to repossess your home, they’ll now have a property that’s worth less than the loan they approved. When they sell it, there’s a risk they might not recoup the full outstanding loan.

Of course, the lower the LTV, the lower the chance of this happening, and the lower the risk to the lender.

Risk determines interest rate and repayments

As the lender is taking a larger risk with a higher LTV mortgage, they typically apply a higher interest rate. In turn, this means higher repayments. 

Consider the £300,000 example from earlier. Using a deposit of £60,000, and a mortgage of £240,000 – a LTV of 80% – Nationwide would offer a two-year fixed mortgage at 2.04%. 

Source: Nationwide. Figures correct as of 23 February 2021

This would mean monthly repayments of £1,021.93 for the first two years.

However, if you had a deposit of £45,000 – and so a LTV of 85% – the equivalent two-year fixed-rate on offer is at a rate of 2.79%. This would equate to monthly repayments of £1,181.57.

Source: Nationwide. Figures correct as of 25 February 2021

This means in just two years, a deposit of 15% rather than 20% would see you pay nearly £4,000 more.  

Higher LTV products are harder to find

As higher LTV means more risk for lenders, it also means there are fewer products available across the market.

Moneyfacts figures from January 2021 showed that there were just 160 deals at 90% LTV (i.e., a 10% deposit).

As the LTV decreased, there were more and more products available: there were 439 deals available to borrowers at 85% LTV, and 629 deals available at 75%.

Simply put, the larger your deposit or equity:

  • The better the choice of mortgage products

  • The lower your interest rate will typically be.

First-time buyers most likely to take out a high LTV mortgage

Unsurprisingly, first-time buyers favour higher LTV mortgages. This is largely because first-time buyers are younger, and therefore less likely to have enough cash for a sizable deposit.

According to data from MoneySuperMarket in October 2019, the average LTV for first-time buyers was 82%, while the average homebuyer borrowed 67%.

Source: MoneySuperMarket

If you’re an average first-time buyer with an 18% deposit (i.e., a LTV of 82%), it may be worth trying to save that extra 2% to make up a 20% deposit. This could allow you to benefit from a wider choice of deals – and lower rates – if you can reduce the LTV to 80%.

Get in touch

At NM Money, we can help you find the right mortgage for your needs, and help you understand the impact of loan-to-value on your mortgage. Request a callback or call us on 03300 583 859.

Please note:

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.