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What is loan to value?
A quick summary
Before you apply for a mortgage, you’ll need to know your loan to value ratio (LTV). This is the amount of money you are borrowing compared to the value of the property.
If you have a high LTV ratio, you may only be offered a higher interest rate on your mortgage deal. This will mean bigger monthly mortgage payments.
A low LTV ratio could mean you could get lower monthly mortgage repayments, as the rates are likely to be lower.
Loan to value ratio and equity
Having a good LTV, will mean you have more equity in your home. Along with a good-sized deposit, this can lower the interest rates offered to you.
A higher LTV is a greater risk to lenders. Especially if the property market drops. This is because your existing mortgage could exceed the value of your home. This is when the lender puts you in negative equity.
Working out the LTV
The easiest way to work out your loan to value ratio is to take away your deposit amount from the value of the house. You then work out the difference between the remaining value and your mortgage, calculated as a percentage.
The larger your deposit, the lower your LTV. Think about how much you can afford as a deposit, before applying for a mortgage.
How to improve your LTV ratio
Increase your deposit and borrow less
The best way is to put down a bigger deposit on your home. You may have to wait until you’ve saved up. But you could get a better mortgage deal, which may cost you less in the end.
Buy a cheaper home
Find a house with a lower asking price and you’ll reduce your LTV. This could be fewer bedrooms or in an area where house prices are lower.
Look for help
If you’re a first time buyer or wanting to own a share of the home, you could benefit from the government’s shared ownership schemes.
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