What is a LTV (Loan To Value) Mortgage?

When looking into getting a mortgage, whether it’s your first or the 31st, you will undoubtedly come across the phrase loan to value. But what what does loan to value mean in mortgage terms? In this blog we will go through the ins and outs of loan to values and the best way to get information about loan to value limits with your mortgage.

What Is Loan To Value

Perhaps one on the most important fundamentals of a mortgage, yet also one of the most misunderstood elements. Loan to value or (LTV) is a major deciding factor of how much mortgage you actually need to secure from a bank, how much income you need to be in receipt of to achieve the mortgage, and the amount of deposit you need to mortgage the property.

So what does loan to value mean? LTV is the loan or mortgage that you need compared to the value of the property. So essentially, what value is left over once you have deducted your deposit from the total value of the property. It’s as simple as that really. The loan you need compared to the value of the house or flat.

How To Work Out Loan To Value

How is loan to value ratio calculated then? This can be a simple thing to calculate if you have the right guidance or a very difficult thing if you don’t speak to a professional before. The best thing you can do to find out how to accurately calculate loan to value is give a mortgage professional a quick call and they will be able to go through your deposit figures and property prices to give you an accurate figure. In the meantime, here is a simplified breakdown of how to work out LTV mortgage with some useful examples.

Example Of LTV Mortgage 1

The first thing to do is to think of a property as one whole thing (100%). If we wanted to buy a house that was £400,000 the 100% value would be £400,000. Let’s say that you had £60,000 deposit available as a deposit. This could be from your own savings, a family gift (if you are lucky!), or from the sale of another property in the background. By deducting your deposit from the 100% value of the property (£400,000), you would be left with £340,000. This £340,000 would be the mortgage that you would need to secure with the help of a professional advisor.

Ok, so now we know the mortgage you need and the deposit you are putting down. So where does LTV come in to things? The LTV figure if the percentage of the 100% value of the property that your mortgage is. This can be worked out the following way:

• The best way how to calculate ltv mortgage is by first taking the 100% value (£400,000)
• Then take the mortgage required amount (£340,000) and divide it by the 100% value (£400,000)
• This will leave you with 0.85
• Then multiply 0.85 by 100 which will leave you with 85
• Add a % after the 85 and you will get the LTV 85%
• To work out the percentage value of your deposit just take the 85% LTV away from the 100% total value which will leave 15%
• Your deposit is 15% and your LTV is 85%

Example of LTV Mortgage 2

Let’s look at another example with a larger purchase price to make it a little bit more tricky.

• You are looking to buy a property valued at £1.6 million (100%)
• Your deposit is £250,000 from the sale of another property. The mortgage required is £1,600,000 subtract £250,000 which leaves £1,350,000
• What is the ltv and what is the deposit percentage?
• Firstly divide £1,350,000 (mortgage required) by £1,600,000 (Full purchase price) which would leave 0.84375
• Multiply 0.84375 by 100 which gives you 84.37
• Add a % sign to the end and your LTV will be 84.37%
• Take 84.37 (LTV) from 100 (Full value of property) and you will be left with 15.63% (Your deposit)

What Is A Good Loan To Value Ratio UK?

Generally in this day and age, having a larger deposit and a smaller mortgage is definitely preferable for a number of reasons. Of course, this would then mean that your LTV is fairly low. E.g. a 60% deposit would leave a 40% LTV mortgage. When it comes down to the question of what is a good loan-to-value ratio, uk mortgage lenders generally want your deposit to be at least 10% but some will go as low as 5% deposit. But, the lenders prefer borrowers who have a larger deposit as the risk factor of lending is lower.

Don’t quite understand what that means? Don’t worry, that’s why we are here! Mortgage lenders are literally giving their own money to members of the general public and trusting that they will pay it back. The larger the mortgage, the higher the risk factor of people defaulting on payments, failing to keep up the agreement and subsequently having the property repossessed. When looking at lending to borrowers, the lender will carefully consider the ltv you need and will assess 1) Is this person borrowing too large a mortgage for their repayment capability? 2) What is the likelihood that this person can afford the loan based on how much deposit they have managed to save/have been gifted by family?

Many mortgage lenders will charge higher interest rates on higher ltv mortgages and lower rates on lower ltv mortgages to incentivise putting down more deposit. But of course mortgage lenders know that not everyone is able to put down a large deposit, and especially for people like first-time buyers, saving a large deposit is next to impossible when you are also paying for expensive rent! So there are plenty of lenders offering products for high ltv mortgages.

What Is The Lowest LTV Mortgage Available?

For those who are fortunate to not need a large mortgage, getting a low ltv mortgage can sometimes be tricky. It might sound strange but yes, requiring a low loan can be more difficult than getting a high mortgage. This is mainly because the lender wants to make sure that their investment and time is well spent on something that is going to make them a profit. For example, if someone has a £800,000 mortgage, they have the potential to make hundreds of thousands in interest on the loan over the mortgage term. But if someone has a £50,000 mortgage they might only make a couple of thousand so they would prefer the higher money earning loan.

Different mortgage lenders have different mortgage criteria around loan to values and minimum mortgage amounts but generally lenders will say that your mortgage needs to be AT LEAST £5,000 (although this is probably too low for most lenders) so we suppose that if your property is worth £150,000 your LTV could be as low as 3% but it is extremely unlikely that this would be an acceptable mortgage with a lender. In more realistic terms, perhaps something like a 10% or 20% LTV mortgage might be a more reasonable minimum mortgage amount.

Who Is Offering 95 LTV Mortgage?

Over the last 2-3 years there has been a huge shake up in mortgages available and lender criteria, starting with the COVID-19 pandemic in 2020 and then followed by the economic crisis in the UK. During the early days of the COVID-19 pandemic, mortgage lenders changed their LTV allowances and requested higher deposits, almost completely removing 5% and 10% deposit mortgages from the market. This generally continued for the next couple of years when the economic crisis occurred in 2022.

For a number of years, the questions on a lot of borrowers lips were “When will 90% ltv mortgages return” and even “When will 95% mortgages return?”. Thankfully, even in an economic crisis, there are lots of lenders who are offering loans up to 95%, although the economic crisis has caused lenders to bump the rates for these products up fairly high.

Most high-street banks and building societies will offer up to 90% mortgages on older properties (non new build) and a great number will also offer 95% mortgages. To get one of these high ltv mortgages, you would currently be looking at rates of around 5-7% depending on the lender. As long as you discuss your potential mortgage with a professional advisor, they will be able to help you find the best lender, the best product and the best rate for your circumstances to make sure that your mortgage is affordable.

How To Work Out Loan To Value Remortgage

So we now now what is a ltv mortgage in terms of purchasing a property, but what about when you are looking to remortgage? Despite not buying a new property and not having a deposit specifically in most cases, it is basically exactly the same. There are many reasons why someone might want to remortgage. They might do it to bring their monthly costs down, they might do it to release some equity from the property for home improvements, or they might do it to consolidate some debts into one manageable payments.

Remortgaging on your own can be difficult to do, but through a mortgage broker this can be a very swift and stress free process. The first things that needs to be considered is the value of your property and how much mortgage (if any) you have outstanding already. Then you need to identify how much mortgage you need. After that, your advisor will check that the mortgage lender you are either currently with or a different lender that they have helped you choose will allow the LTV that you are looking to borrow. Here is one example to illustrate how a remortgage could work and the loan to value figures.

LTV remortgage example

You might have bought a property 10 years ago for £250,000 at 85% LTV (£212,500). Over the 10 years you could have paid off £70,833 of the mortgage for example. That means that the total you owe on your mortgage is now £141,667. Lucky for you, there has been a huge property boom in your area and your house is now worth £100,000 more than you originally paid for it. Your property is now worth £350,000. That means that your mortgage is only at 40% loan to value and your equity in the property is £208,333.

Remortgage To Release Equity

Rather than sell your home and upsize, you would much rather build an extension to the property. You have been quoted £100,000 by a builder for the extension but you don’t have £100,000 spare in savings. In this instance, you speak to your mortgage advisor about potentially remortgaging to release some equity for the extension. Your advisor does some research and finds out that your lender NatWest allows you to borrow up to 90% LTV on remortgages, as long as you can afford it. Meaning that the largest mortgage your could potentially secure against your property is £315,000 (90% of £350,000).

£315,000 is way more than you need for the extension, but you decide that £110,000 should be enough to pay for the build and purchase some essentials once the build is complete. Because you still have £141,667 mortgage outstanding on your original mortgage, you will need to make sure that your remortgage covers this balance and the new borrowing amount required to. £141,667 + £110,000 = £251,667. This will be the total remortgage amount required.

If your property is worth £350,000 and your new remortgage amount is £251,667 your new LTV is 71.9% which is still allowed by your lender. Your equity in the property is £98,350. The only difference between this scenario and the purchase scenarios we went through earlier in the blog is that your deposit is replaced with the equity in your property.

What Are My Next Steps?

If you are looking to remortgage or purchase, making sure that you know exactly how much you are borrowing and what is an ltv mortgage is essential. The first thing to do is get in contact with a qualified mortgage professional who can offer mortgage advice on a number of levels. You also want to make sure that your advisor is open to the whole of market so that they can find you the best loan to value mortgage deals available. Oportfolio mortgages are one of these brokerages. Give us a call for free today to speak to one of our advisors about your new mortgage. We are here to help.