When you first start exploring mortgages in the UK, one thing you’ll quickly encounter is a lot of specialist terms and potentially confusing acronyms. It’s a secret no one ever tells you that understanding these terms is probably the most important part of getting the best mortgage possible for your personal situation. And one of the most important concepts you’ll need to grasp is Loan to Value or LTV. Understanding what is loan to value is fundamental because it directly impacts the mortgage deals you can access, your interest rate and how lenders view your application.

Today, we’ll explain exactly what is loan to value, how it’s calculated, why it matters so much to both lenders and borrowers and how it influences your mortgage options

 

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Defining Loan to Value (LTV)

Simply put, Loan to Value (LTV) is a percentage that represents the size of your mortgage loan compared to the total value of the property you’re buying or remortgaging. It basically shows how much of the property’s value you are borrowing and how much you are contributing from your own funds (your deposit or existing equity).

So if you’re asking “What is loan to value” you’re basically asking what is the ratio of my contribution to that of the lender.

How is Loan to Value calculated?

The calculation for LTV is relatively straightforward:

LTV (%) = (Mortgage loan amount / Property’s appraised value) x 100

An example LTV calculation

Let’s say you want to buy a property valued at £200,000.

  • You have a deposit of £40,000 saved
  • This means you need a mortgage loan of £160,000 (£200,000 property value – £40,000 deposit).

In this case your LTV would be:

(£160,000 / £200,000) x 100 = 80% LTV

Another way of looking at this is to think that this means your deposit is 20% of the property’s value (£40,000 is 20% of £200,000).

The key thing to remember is:

  • A larger deposit results in a lower LTV.
  • A smaller deposit results in a higher LTV.

Why is LTV important to lenders?

Lenders almost always pay very close attention to your LTV because it’s a primary indicator of risk for them:

A lower LTV means you have more equity (your own money or value) invested in the property. From the lender’s perspective this means you have more to lose if you can’t keep up repayments and they are less likely to lose money if they unfortunately had to repossess and sell the property (as there’s a larger buffer between the loan amount and the property value).

Because lower LTVs represent lower risk, lenders typically offer more favourable (i.e. lower) interest rates and a wider range of mortgage products to borrowers in these bands. They often structure their product ranges with different rates for different LTV tiers (e.g. 90% LTV, 85% LTV, 75% LTV, 60% LTV).

Understanding what is loan to value helps you understand why mortgage rates can vary so much from person to person.

How LTV impacts you as a borrower

At the end of the day, your LTV ratio has a direct and significant impact on your mortgage journey. It’s perhaps the biggest influencing factor in your mortgage application

Access to more deals and better rates

Typically the lower your LTV (meaning the larger your deposit or equity), the more mortgage deals you’ll likely qualify for and the more competitive the interest rates will be. This can save you a substantial amount of money over the term of your mortgage through lower monthly payments and less overall interest paid.

Deposit requirements

Your LTV also directly reflects the minimum deposit you need. For example to achieve a 90% LTV mortgage you need at least a 10% deposit. If you only have a 5% deposit you’ll be looking at 95% LTV products which are usually fewer in number and come with higher interest rates.

Remortgaging

When you come to remortgage (switching to a new mortgage deal either with your current lender or a new one) your LTV will be recalculated. This will be based on your current outstanding mortgage balance and an up-to-date valuation of your property. If your property value has increased or you’ve paid off a good portion of your mortgage, your LTV may have improved potentially giving you access to better remortgage rates.

What are the usually LTV bands?

Lenders often categorise their mortgage products into LTV bands. While these can vary the common tiers you might see are something like:

  • 95% LTV (5% deposit)
  • 90% LTV (10% deposit)
  • 85% LTV (15% deposit)
  • 80% LTV (20% deposit)
  • 75% LTV (25% deposit)
  • 60% LTV (40% deposit) often attracts the most competitive rates.

Generally products for higher LTV bands might also come with slightly stricter lending criteria due to the increased risk for the lender.

Tips to improve your LTV

If you’re looking to improve your borrowing prospects, understanding how to achieve a better LTV is a crucial part of answering “What is loan to value?” for your own benefit. Here are some ways to aim for a lower LTV:

  • Save a larger deposit: This is the most direct method. The more you save, the lower your LTV will be.
  • Think about a more affordable property: Buying a less expensive property means you’ll need to borrow less for the same deposit amount, effectively lowering your LTV. (Check out our guide – what can I afford with my salary?)
  • Gifted deposits: If you are fortunate enough to receive financial help from your family towards your deposit, this can significantly improve your LTV. Ensure your lender accepts gifted deposits and that it’s declared correctly.
  • Overpayments on an existing mortgage: If you are remortgaging having made regular overpayments on your current mortgage, you will have reduced your outstanding loan potentially leading to a better LTV on your new deal.
  • Property value appreciation: Over time if your property’s value increases while your mortgage balance decreases your LTV will naturally improve. This is more of a long-term factor when it comes to remortgaging.

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.