Jumping to the next band of LTV ratio can help you save thousands over the duration of your mortgage because the lower the LTV ratio, the lower your monthly mortgage repayments will be and the smaller amount of interest you’ll pay over your term.
But why is that? This guide explains what an LTV ratio is and how you can calculate it to work out how much deposit you’ll need to qualify for a good LTV ratio.
What is a loan to value ratio for mortgages?
When you get a mortgage, there are lots of factors to consider that affect how good a deal you’re getting and ultimately, how much you pay per month. Interest rates are one of those factors but something that is often overlooked is the LTV rate.
This is the size of the loan you need versus the value of the property you’re buying. So, if you had a £30,000 deposit (or equity) and the value of the property was £300,000, you’d need £270,000 from a lender to be able to buy that property. So, your LTV rate would be 90% because you have 10% of £300,000.
That’s a fairly high LTV rate because a 10% deposit is considered to be quite low. Getting a bank to lend you 90% of a property’s value is possible but keep in mind that the cheaper deals are offered to people with higher deposits.
If you’ve ever been on a comparison site and seen mortgages with better rates when the LTV is lower, that’s why. Afterall, if a bank lends you less, they stand to lose less in the unlikely event that you default (don’t repay) your mortgage.
How do I calculate it?
You can calculate your LTV ratio by dividing the mortgage amount by the value of the property you want to buy, then multiplying that by 100.
The number you’re left with is expressed as a percentage. So, if you’re buying a property worth £250,000 and have a deposit of £50,000, you’ll need to get a mortgage of £200,000.
Mortgage amount = £200,000
Property value= £250,000
£200,000/£250,0000 = 0.8 (x 100) = 80% LTV
What affects the LTV rate I can get?
Usually, the lower the LTV rate, the better for your pockets. Having a lower LTV also means you reduce the amount of loan you need but to do that, you’ll need a bigger deposit.
LTV isn’t the only thing to think about when you look at a new mortgage whether you’re a first-time buyer, homemover or buy-to-let landlord. It’s also important to consider:
Your credit history
How much you earn
How much your monthly outgoings are
The cost of fees associated with the mortgage deal
The cost of your solicitor and mortgage broker
Take credit history as an example. If you have a shaky credit history with a record of late payments, missed payments or worse, a lender is likely to view you as a riskier borrower and consequently, they might not be willing to lend you a larger loan i.e. a mortgage with a high LTV rate.
To show that you’re committed to the mortgage and to qualify for a lender, you might have to save a larger deposit or have more equity behind you. While that’s frustrating, it does mean a lower loan and reduced mortgage repayments which might be better for you if you’ve struggled with debt in the past.
Affordability and loan-to-value rates
Approving a chunky mortgage for someone with a small deposit might make sense under some circumstances. When someone has a proven record of good money management and their income is stable and high enough to meet their financial obligations, a lender might approve a mortgage with a high LTV rate such as 90 or 95%.
However, that’s a big risk to take for a lender when the applicant has circumstances that might make it difficult to make their repayments on time and in full. That’s why affordability checks are so vital for banks and mortgage lenders when determining whether you’re a good fit for their product.
A fluctuating income, a high amount of debt or outgoings, or an approaching retirement which would result in a drop in income can all affect your affordability for a mortgage and therefore, the LTV ratio that you’ll be eligible to apply for.
It’s not impossible to get a mortgage with a higher LTV ratio if any of the above apply but the choice of lenders with lower interest rates will drop, leaving you with options that might not be the best route for your finances now or in the future, especially if interest rates continue to increase.
Does the amount of equity I have affect my mortgage when I buy my next house?
Yes. If you’ve already owned property and you sell it, you could use the proceeds from the sale as payment for your next property. That’s what lenders refer to as equity. It’s defined as the portion of your property’s value that doesn’t have a mortgage so, the more equity you have, the better.
Making overpayments on your mortgage also increases the amount of equity you have and decreases your loan-to-value ratio because you’re lowering the balance owed on your mortgage. Depending on how much equity you have, when it comes to buying your next property, you may be able to qualify for a new mortgage with a low LTV and therefore a lower interest rate.
The price of the next property will determine how low your new LTV rate will be too, as if you need to borrow more, that will naturally affect the portion of equity you have against the mortgage amount you need.
Remortgaging and loan-to-value rates
If you own a property but aren’t looking to sell to buy, and instead, you’re looking to remortgage, having more equity puts you at an advantage. You might have paid off a significant amount of your current mortgage, or your property might have increased in value.
That extra equity you own gives you security in case you need to suddenly sell or remortgage to access some of the value that’s locked in the property. A remortgage lender usually looks favourably on homeowners that can apply for deals with lower LTV ratios because that type of borrower is more financially invested in the property and has a proven track record of paying back a mortgage.
If you want to remortgage to a new lender, or transfer your mortgage with the same lender, always check your eligibility with a mortgage broker before making an application. Even if you think you’ll get approved, don’t rush into it - it’s a huge financial commitment and you could be throwing away money needlessly by paying for arrangement fees and then getting rejected.
There’s also a huge range of lenders in the UK to consider that could offer you a cheaper deal, or a higher amount of finance if that’s what you need and it’s affordable.
First-time buyer LTV rates
If you’re a first-time buyer, the chances are you’ll have needed to borrow a higher percentage of the home’s value from the lender because you haven’t had a previous property to sell. That is of course, unless you have a large deposit or you’re using equity from your parent’s home as security for your mortgage.
That’s known as a Springboard mortgage and would involve your parents or a close relative allowing you to use their savings or equity so that you can buy your own house with your own mortgage. It’s not a gifted deposit though, as with a Springboard arrangement, they’d get their money back, with interest after 5 years.
Lowering your LTV rate with a Springboard mortgage
Buying a home this way could allow you to meet a larger deposit requirement and reduce the LTV rate on the mortgage deal, meaning you pay less interest on your repayments.
There’s a lot to consider with a Springboard mortgage or a gifted deposit scheme, if you’re considering that also. It’s a lot to ask a parent to agree to, as ultimately, it puts their finances at risk too, so ideally, you should each have separate solicitors and a mortgage broker so that you can sit down together to discuss whether it’s the right route for all of you.
Ask us for advice about your LTV rate
We don’t bite. We’re a friendly team of approachable professionals, qualified to give advice and experienced in listening. We’ve helped thousands of people, including first-time buyers, landlords and homemovers work out their loan-to-value rate and get approved for an affordable mortgage or remortgage deal.