Understanding LTV

What is LTV?

The phrase ‘LTV’ stands for loan to value. It’s a percentage lenders use to describe how much of a property’s total value is being borrowed as a mortgage. 

Mortgages with a lower LTV tend to offer lower interest rates. So the bigger a percentage of the property's value you can save as a deposit, the lower your LTV, and the more likely you'll be to access better mortgage deals. 

What to think about while saving your deposit?

Most lenders ask for at least a 10% deposit to be able to get a mortgage. (Although some first time buyers can get a mortgage with a lower deposit). 

Let’s say the property you want to buy is £200,000. Most lenders will ask for a deposit of at least £20,000; 10% of the total value of the property. 

The remaining 90% - £180,000 in this example - will be the amount you borrow as your mortgage.  This is known as 'Loan to Value' - or LTV. So the LTV on a mortgage for a £200,000 property with a £20,000 deposit is 90%. 

How to get a lower LTV?

If you can save a deposit that’s more than 10% of the property’s value your LTV would be lower. Continuing the example above, let's say you have a £25,000 deposit for the £200,000 house you'd like to buy. £25,000 is 15% of the total value of the house, so the LTV of your mortgage would be 85%. 

How much should you save for a deposit? 

Most lenders ask for a deposit that’s at least 10% of the value of the home. But saving a larger amount could boost your chances of being accepted for a mortgage, or help you access better deals.  

Having a larger deposit means you’ll be able to apply for mortgages with a lower LTV. And these mortgages typically have lower interest rates.    

LTV is also important down the line

LTVs are even more important when you come to re-mortgage. That's because property prices fluctuate. And the LTV on the property you own will be calculated based on its value at the time you re-mortgage. 

If your house value drops, you could end up owing the lender more money than the house is worth. This is called negative equity and usually means you're unable to re-mortgage to a new lender.  

However, if your home increases in value your LTV could drop, making it more likely you'd be able to access better mortgage deals with lower interest rates.