When you take out a mortgage, you’ll have to put down a cash deposit to secure the sale.
Usually, this is around 10% of the property’s value, but it can be more (and sometimes less).
Just how much of a deposit you do put down will affect your new home’s LTV.
LTV stands for loan-to-value, and it’s shown as a percentage. It means how much your mortgage is, compared to how much the house is worth. For example, if you put down a deposit of 10%, you’ll be looking for mortgages with a LTV of 90%.
Why it’s important
Having a low LTV is a good thing if you’re looking to get a mortgage or switch to a better deal.
Generally, the lower your LTV, the better. This is because you should be able to access better rates if you have more cash in the home or as a deposit.
A mortgage lender will probably offer you a better rate when you switch deals if you have a 50% LTV rather than a 70% LTV.
The amount of money you’ve paid into your home – from your deposit or the total amount you’ve paid off your mortgage so far – is known as the equity.
The value of a house can change based on a whole host of factors. Sometimes they go up in value, whereas other times they can drop.
In turn, this means your LTV and equity can also go up or down – which can be good or bad news.
For example, let’s say you buy a house for £100,000 and you put down a deposit of £10,000. You take out a mortgage of £90,000 to pay for the rest. After a few years, you’ve managed to pay off £10,000 on your mortgage. This now means your LTV is 80%, and 20% of your home is equity.
However, trouble in the property market means the value of your home has dropped to £90,000. This now means your LTV is just 90%, and your equity is 10%.
Fortunately, this is rare - but it does happen.
On the flipside, property often goes up in value too. So picture this: instead of dropping in value, a recent spike in demand in your area means your home’s gone up in value by £10,000. This is great news for you, as it now means your LTV is 72% and your equity is 28%.
You’ve gained an extra £10,000 in equity, bringing your total to £30,000.
Scouting out a remortgage deal
Having more equity in your home means you’ll likely have access to better (and cheaper) mortgage deals.
If you’re nearing the end of your current mortgage term, you might be able to get a better deal by remortgaging.
To help you find out your LTV, you can use this simple calculation: divide the amount you owe on your mortgage by how much your home is worth. Then, times it by 100.
We’ll give you an example to make things easier. If you owe £80,000 on your mortgage and your home is worth £110,000, you should divide £80,000 by £110,000.
This gives you 0.72.
Multiply this figure by 100 and you get 72. This means your LTV is 72%.
Once you know this, you can think about remortgaging. First, speak to your current lender to ask if there are any deals for loyal customers, as otherwise they may just put you on to the standard rate – which usually won’t be the best deal around. If they haven’t, or you can find a better deal elsewhere, you should make the switch to a new lender.