When applying for a mortgage, you’ll see the phrase ‘loan-to-value’ (LTV) used a lot.
But the phrase loan-to-value can cause some confusion, especially the way it is presented when looking for a mortgage.
What does loan-to-value mean?
Quite simply, loan-to-value is the amount of the property value that you take out a mortgage on, compared to the total value of the property.
For example, if you have a property worth £200,000, and you have a mortgage of £150,000 on that property, then you have a loan-to-value of 75% (and subsequently £50,000 of the property as equity.)
When you are looking to get a mortgage, the lender expresses their mortgage offer in a loan-to-value amount, meaning they will lend up to that percentage of the property value, typically from 50-95% LTV.
How can I work out LTV?
To work out LTV, you need to establish what percentage of the property value you will need to borrow, and how much you can cover with your deposit.
To do this, divide the mortgage amount by the value of the property, and then multiply by 100 to get the LTV amount.
For example, if we use the figures above, and your property was worth £200,000, you would take the amount you want to mortgage (£150,000), divide it by £200,000 and multiply by 100, which would give you the 75% LTV amount.
What is a good LTV?
The lower you can get the LTV amount, the more mortgage products you will have access to, as you will provide a relatively low risk to lenders, as you will be providing a bigger deposit or a large amount of equity when remortgaging.
By providing a larger deposit or a large amount of equity, you’ll be able to access lower rates.
If you don’t have a large deposit or amount of equity to put down, you will be restricted in the amount of mortgage deals you have access to.
But don’t worry, there are still mortgages out there and lenders are always offering higher LTV deals, even though you will be paying a higher rate.
For more information on LTVs, and the mortgages available to you, speak to one of our expert advisers.