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What Does LTV Mean?
When applying for a mortgage, it’s not uncommon to come across some unfamiliar terms and abbreviations. One of these abbreviations is LTV. So, what is LTV in a mortgage? How does it affect you and your mortgage borrowing?
LTV stands for loan-to-value. This is the ratio amount you request as a loan divided by the property value.
For example, if lenders are willing to give you 90% of the total amount of the property, then your loan-to-value ratio is 90%. This means there is a 10% mortgage balance. You will have to pay a deposit of 10% of the value in order to complete your purchase. Most mortgage lenders require a deposit of at least 5%, but this varies and is based on numerous factors, which we’ll touch on below.
What External Factors Affect The Loan-To-Value Ratio?
There are a variety of factors that affect the LTV ratio, such as the type of property, the property value, your employment status and income, and your creditworthiness. These are factored into the equation to establish the LTV ratio. Let’s look at some of the important points that affect the loan-to-value ratio.
Property market
The property market is not really stable. Property values rise and fall. In a market where property values drop, there is more risk for the lender. This results in higher LTV ratios. When house prices are lower, you could get a more affordable property. However, the LTV ratio may be higher at that time, which could be more expensive in the long run.
The loan amount
If your loan amount is larger, then you will have a higher LTV ratio. If you require a smaller loan amount, then you are seen as low-risk and will have a lower LTV ratio.
Your deposit
This point goes hand in hand with your loan amount. If you have a larger deposit, you will require a smaller loan amount, giving you a lower LTV ratio.
Simply put, a larger deposit means lower LTV mortgages. This is why saving up for a deposit is important.
Property type
The property type and your intention for the property will also have an effect on the LTV ratio. If you intend to live on the property, then your LTV ratio may be lower. If you intend to let the property, then you may have a higher LTV ratio.
Income
How much you earn puts you in a different bracket as well. If you have higher earnings and more disposable income at the end of the month, then you are seen as a lower risk. If you have a lower income with less money to spare, then you are seen as a higher risk.
Creditworthiness
A big factor is your creditworthiness. If you have a history of being a good payer who pays fully and on time, you are seen as someone worthy of additional debt. This means you may be offered a good LTV rate.
What Are High LTV Mortgages?
High LTV mortgage deals are ones where the mortgage amount is more than 80% of the total value. Anything below 80% of the total value would be considered a low LTV ratio. Lenders see a higher loan-to-value rate as being risky and thus may charge higher interest rates.
In the UK, a loan amount that is higher than 80% of the total value is calculated with LTV bands. These LTV bands work in 5% increments, such as 80%–85%, 85%–90%, all the way to 100%. The higher the LTV band, the higher the interest rates that could apply.
How Does The LTV Ratio Affect You?
A mortgage lender usually considers an unbalanced (high) LTV ratio as a higher-risk investment. This could affect the interest rate and the mortgage loan amount you are offered.
A high LTV ratio means that you will have larger monthly payments. It could also mean that you pay a higher interest rate and have less equity.
During the mortgage process, potential lenders also look at market trends. They consider if property values are rising or falling. If property values are falling, you could end up having negative equity. This means that your property is valued at less than the amount you need to repay.
The LTV ratio could affect how much capital you have left for home improvements as well, because you may be required to lay down a larger deposit in order to secure the mortgage deal.
Loan Calculators
Many estate agents and banking websites have a mortgage calculator. Loan-to-value ratios can also be calculated online, which will give you a good indication of the mortgage loan you would require. For example: If you have a deposit of 5%, you can calculate the outstanding mortgage balance that you would need to apply for.
FAQs
How can I get a good LTV mortgage rate?
Make sure you have a good credit score. Settle any outstanding debts and ensure any smaller loans are paid on time. Also, make use of mortgage brokers. They can help find you the best mortgage deals and negotiate better rates on your behalf.
Should I buy a house if house prices are high?
The sooner you step onto the property ladder and start investing in your own home, the better it could be for you. If you find that house prices are too high, then save up for a deposit, create more equity, and only then start looking for mortgage deals with lower interest rates and borrowing costs.
What is the maximum LTV ratio I could be offered with little equity?
Mortgage lenders take all factors into consideration. If you are looking at a lower house price with lower mortgage rates, they may consider offering a 100% mortgage deal. However, rather save up to reduce the mortgage amount you will need.
SOURCES
https://www.investopedia.com/terms/l/loantovalue.asp
https://www.landc.co.uk/calculators/loan-to-value/
https://www.lloydsbank.com/mortgages/help-and-guidance/moving-home/what-is-loan-to-value-ratio.html
https://www.forbes.com/uk/advisor/mortgages/loan-to-value-ratios/