What is loan to value (LTV)?
When applying for a mortgage or secured loan, you’ll likely come across the term loan-to-value (LTV), but what does it mean?
5 min read
In a nutshell
- Loan to value (LTV) is a measurement which compares a loan amount against the value of your property.
- Lenders use LTV to assess the risk of lending you money.
- The lower your LTV, the less risky you are to a lender.
- A lower LTV can mean an increased chance of eligibility and better interest rates.
Understanding LTV
The LTV ratio is a measurement that lenders use to assess the risk of lending you money. It's a simple calculation that compares:
- the amount of the loan you're looking to borrow
- to the value of the property you're buying or refinancing.
Understanding your LTV can be a game-changer. It not only affects whether you’re approved, but also determines the interest rates and deals available to you.
Knowing how to manage and improve your LTV could mean saving thousands over the life of your loan. Here’s what you need to know about LTV and why it matters.
How to calculate your LTV
To work out your LTV…
- Determine the loan amount: This is the amount you are borrowing.
- Determine the property value: This is the current market value of the property.
- Calculate the LTV ratio: Divide the loan amount by the property value and then multiply by 100 to get a percentage.
Example:
Let's say you want to buy a house that is valued at £200,000, and you plan to borrow £150,000.
The calculation would be…
- £150,000 ÷ £200,000 = 0.75
- 0.75 x 100 = 75
So, in this example, the LTV ratio is 75%. This means you are borrowing 75% of the property's value and providing the remaining 25% as a deposit.
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What is a good LTV?
A lower LTV ratio is generally better because it means you're putting more of your own money into the deal, which reduces the lender's risk. This is because if you default on payments, the lender knows they’re more likely to get back their losses.
As well as providing security to the lender, LTV is important to you because:
- Lenders use the LTV ratio to help decide whether to approve your loan, and a lower ratio can improve your chances.
- A lower LTV ratio can increase your likelihood of getting a lower interest rate, saving you money over the life of the loan.
How to improve your LTV ratio
If your LTV ratio is too high, there are a few ways you can improve it:
- Increase your deposit: The more money you put down, the lower your LTV ratio will be.
- Consider properties within a lower price: Choosing a property with a lower price tag can help reduce your LTV ratio.
- Pay off any existing loans: If you're refinancing, paying down your existing mortgage can help lower your LTV ratio.
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