Everything you need to know about loan-to-value ratios
When you’re taking out a mortgage, it can be difficult to understand the terminology, which might seem like it’s filled with jargon and acronyms. Indeed, one such term “loan-to-value” or “LTV” can be confusing. If you’re unsure what LTV means, read on to find out and discover why it could be important if you’re searching for a mortgage.
LTV is used to show the ratio of a loan to the value of your home.
So, if you’re taking out a mortgage to purchase a property with a value of £300,000, and you used a £30,000 deposit to secure the mortgage, the LTV would be 90% because you’ve borrowed 90% of the property’s value. If you’d increased your deposit to £40,000, the LTV would fall to around 86.67%.
When you’re searching for a mortgage deal, you might notice that the deal specifies an LTV. For example, it might state that it’s a “two-year fixed-rate 80% LTV”.
Lenders will usually have mortgage deals available for different LTV ratios, typically decreasing in 5% or 10% increments. Moving into a lower LTV bracket could mean you’re able to access a lower rate of interest.
The loan-to-value ratio could affect the interest rate you pay
When you’re taking out a mortgage, the LTV is important as it may affect the interest rate you’re offered. This is because a lender is likely to view you as less of a risk if you’re in a lower LTV bracket.
According to Moneyfacts, as of September 2024, the average rate of a two-year fixed-rate mortgage deal with a 90% LTV is 5.85%. Now, if you want a similar mortgage but have a 60% LTV, the average interest rate falls to 5.02%.
That difference might seem insignificant at first glance. However, as you’re typically borrowing large sums through a mortgage, even a small difference in the interest rate can add up.
Let’s say you’ve borrowed £250,000 through a repayment mortgage with a term of 25 years with an interest rate of 5.85%. Your monthly repayment would be £1,588. This figure would fall to £1,465 if you had an interest rate of 5.02%.
More significant is the total cost of borrowing over the full mortgage term.
Using the above scenario, you’d pay £226,397 in interest with an interest rate of 5.85%. However, with an interest rate of 5.08%, the total interest paid would fall to £189,437. So, accessing a lower interest rate, even one that seems only marginally smaller, could save you thousands of pounds over the long term.
As a result, when you’re searching for a new mortgage, understanding your LTV could be important. In some cases, you might find that you’re just above the threshold for moving into a lower LTV bracket. So, paying a relatively small lump sum off your mortgage could be beneficial when you consider the potential savings.
What steps could you take to move into a lower LTV and potentially save money?
Your LTV will fall as you make mortgage repayments
If you have a repayment mortgage, your LTV will usually fall as you make the repayments – as the amount you’re borrowing in comparison to the value of the property will decline.
You might also choose to make overpayments, either through one-off lump sums or increasing your regular repayments, which would mean the LTV falls quicker.
It’s not just your outstanding mortgage that affects the LTV, so does the value of your home. As a result, if the value of your home rises because you’ve carried out improvements or simply because prices in your area are rising, the LTV could also fall.
Get in touch if you need to take out a new mortgage
If your mortgage deal has expired or will do so soon, we could help you secure a mortgage deal that’s right for you, no matter the LTV band you’re in. Please get in touch to speak to one of our team and arrange a meeting to discuss how we could help you.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
