Mortgages: what is LTV (loan-to-value)?

16 June2011

If you're looking for a mortgage, you may have come across the term 'LTV' or 'LTV ratio' - which stands for 'loan-to-value ratio'.

The LTV on a mortgage basically describes what percentage of the property's value you're borrowing on that deal. So if a mortgage deal has an 80% LTV, it means you're borrowing 80% of the value of the property.

The remaining 20% is made up by your deposit. So to get a mortgage deal with an 80% LTV, you'd need a deposit of 20% to qualify.

So, for example, if you have a 20,000 deposit and you're looking to buy a 100,000 property, you'd need a mortgage deal with an 80% LTV (you'd borrow 80,000).

The same would apply if you had a 40,000 deposit and were looking at a 200,000 property (you'd need to borrow 160,000 - 80% of the property's value).

If you have a deposit ready to put down on a house but don't know what your LTV would be, you can use the following simple formula:

(mortgage amount house value) x 100 = LTV ratio

If you're still not sure, ask a mortgage adviser to help you.

Why is the LTV important?

The cost

Mortgage deals with a higher LTV tend to be more expensive (in terms of interest rates) than those with a lower LTV.

For example, a mortgage with an 80% LTV might carry an interest rate of 4%, while an equivalent mortgage with a 90% LTV might carry a 5% interest rate. And a higher rate means higher monthly payments (assuming the mortgages are the same in other ways).

The risk

The higher your LTV, the smaller your deposit (relative to the overall value of the property). Any drop in the value of your home basically reduces the value of your deposit/equity (as a percentage), which could cause problems further down the line.

For example, if you take out a mortgage with a 90% LTV, you'll have a deposit of 10%. A 5% drop in your home's value would technically leave you with only a 5% deposit, meaning you'd only have access to mortgage deals with a 95% LTV when it came to remortgaging - and there are not many of those available these days.

Worse still, if your home drops in value by more than the value of your deposit, you would be in negative equity. This basically means that selling your house wouldn't raise enough money to pay off the mortgage. This can make it extremely difficult to get a new mortgage deal.

So the greater your deposit, the greater your protection against potential falls in value.

Just remember - with any mortgage, your property may be at risk if you don't keep up with your payments.

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Tags: mortgage, LTV, loan to value

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