When you’re applying for a mortgage, one of the key metrics that lenders will look at is the Loan to Value (LTV) ratio. Understanding this concept is essential, as it can have a big impact on your mortgage application, the rates you’re offered, and your ability to get approved in the first place.

In this guide, we’ll explain what Loan to Value is, how it’s calculated, why it’s important, and how you can use it to your advantage when applying for a mortgage.

How do you work out your LTV ratio?

The Loan to Value ratio is a simple calculation that shows how much of the property’s value is being financed by the mortgage. It’s a percentage figure calculated by dividing the amount you want to borrow by the property’s market value or purchase price.

Here’s the formula:

LTV Ratio = (Loan Amount ÷ Property Value) × 100

For example, if you’re buying a house for £200,000 and you plan to take out a mortgage of £150,000, the LTV ratio would be:

LTV = (£150,000 ÷ £200,000) × 100 = 75%

This means you are borrowing 75% of the property value, and the remaining 25% is covered by your deposit.

Understanding the Loan-to-Value (LTV) Ratio

The LTV ratio is a critical figure for both you and your lender. The higher your LTV ratio, the more risk there is for the lender because you’re borrowing a larger proportion of the property’s value. If the LTV ratio is too high, lenders may be less inclined to approve your mortgage application, or they might offer you a higher interest rate.

For example:

  • A low LTV ratio (e.g., 60% or below) is considered low risk for lenders because you have a larger deposit, meaning you have more equity in the property.
  • A high LTV ratio (e.g., 90% or above) indicates higher risk for the lender, as there’s less equity in the property.

The ideal LTV ratio depends on your individual circumstances, but the lower the ratio, the more favourable the mortgage terms might be.

Why do I need to know my LTV?

Knowing your Loan to Value ratio is important because it directly affects several aspects of your mortgage:

  • Interest rates: Lenders typically offer better interest rates to borrowers with a lower LTV ratio. A low LTV means the lender is taking on less risk, so you could secure a more competitive rate.
  • Mortgage type: A higher LTV ratio may limit your options. Some lenders might not offer loans with high LTV ratios, or they may offer products with less favourable terms.
  • Deposit size: Your LTV ratio determines how much deposit you need. For example, a 90% LTV means you’ll need a 10% deposit. A 75% LTV means you’ll need a 25% deposit. Understanding this helps you figure out how much you need to save.
  • Approval chances: Lenders use the LTV ratio to gauge risk. The higher your LTV, the more likely you are to face higher monthly payments and potentially less favourable terms.

Improving your Loan to Value Ratio

If your LTV ratio is higher than you’d like, there are steps you can take to improve it. Here are some suggestions:

  1. Increase your deposit: The easiest way to improve your LTV ratio is to save a larger deposit. This reduces the loan amount you need and increases your equity in the property.
  2. Choose a cheaper property: If possible, buying a less expensive home will reduce the amount you need to borrow and lower your LTV ratio.
  3. Consider a guarantor: If you’re a first-time buyer or have difficulty saving a large deposit, a family member may be able to act as a guarantor. This could help improve your LTV ratio and strengthen your mortgage application.
  4. Consider government schemes: Some government schemes, like the Help to Buy (Only available in Wales) scheme, may help lower your LTV ratio by offering assistance with your deposit.

Improving your LTV ratio can make a huge difference in your mortgage offer, as it will likely result in lower interest rates and better terms.

How LTV is used by lenders

Lenders use the Loan to Value ratio to assess how much risk they’re taking on with your mortgage. As mentioned, the higher your LTV, the more risk there is for the lender. Here’s how it works:

  • Low LTV (below 75%): These are seen as less risky by lenders, and borrowers with lower LTV ratios often receive the best mortgage rates.
  • Medium LTV (75%–90%): These are still considered relatively low risk, but the borrower might face higher rates compared to those with a low LTV ratio.
  • High LTV (above 90%): These mortgages are considered high risk for lenders. As a result, interest rates will often be higher, and there may be fewer products available. Some lenders may require you to take out mortgage insurance if your LTV is too high.

What is a good LTV?

A good LTV ratio typically falls below 80%. If you’re borrowing less than 80% of the property’s value, you may qualify for the best mortgage deals.

  • Below 60% LTV: Often considered excellent by lenders. You’ll likely have access to the best mortgage rates and a wider range of products.
  • 60%–75% LTV: This is still a good range and may offer competitive rates.
  • 80%–90% LTV: Borrowers may still get decent rates, but the terms could be less favourable than those offered for lower LTVs.
  • Above 90% LTV: This is considered high risk, and you may face higher rates or find it more difficult to secure approval.

Final thoughts

Understanding the Loan to Value ratio is an essential step in the mortgage process. It directly affects your eligibility for a mortgage, the interest rates you’re offered, and your overall monthly payments. If you’re looking to secure the best possible mortgage terms, aim for a lower LTV ratio by increasing your deposit or using other strategies to reduce your loan amount.

If you’re unsure about how to calculate your LTV or want advice on improving your mortgage chances, speaking with a mortgage broker can help guide you through the process.