Understanding Loan to Value

Loan to Value (LTV) might seem like Mortgage jargon or an industry insider secret to some people. However, it shouldn't be the case as understanding how LTV works and how it can impact your mortgage repayments can give you an upper hand over the banks when you apply for your Mortgage.

By the end of this insight, you will have a better understanding of Loan to Value, how it works, and how it can help you save money on your Mortgage. With this knowledge, you can confidently navigate through the Mortgage application process and make informed decisions to save you money in the long run.

Key Takeaways

• Loan to Value (LTV) is a ratio used to express the percentage of borrowing against the value of a property. It is an important ratio used with mortgage borrowing.
• Understanding LTV can help you save money on your mortgage interest. The lower your LTV, the cheaper the interest rate you can be offered by lenders.
• Your LTV is always moving up and down due to fluctuations in house prices and the interest added to your loan. Obtaining an official valuation of your property can help you determine your exact LTV figure.
• Lenders assign interest rates in accordance with the LTV range that your mortgage LTV falls into, and these ranges are known as loan to value brackets. Understanding the LTV bracket you fall into can help you determine the interest rate you will be offered.

What is Loan to Value?

Loan to Value, often abbreviated to 'LTV', is a ratio used to express the percentage of borrowing against the value of a property. This is the main ratio that is used with Mortgage borrowing. 

Loan to Value (LTV) impacts mortgage repayments because it determines the interest rate you'll pay. The lower your LTV ratio, the better interest rate terms you'll receive, potentially resulting in savings on your repayments.

To calculate your Loan to Value, you need to know the two variables. 

• The outstanding amount on your Mortgage
• The current value of your property. 

You are then able to divide the outstanding mortgage amount by the property value. The value you are left with represents how much debt is secured against every £1. To express this ratio as a percentage, multiply by 100.

Loan to Value example

If you have a Mortgage of £200,000 and a property value of £300,000, your Loan to Value will be calculated as follows:

£200,000/£300,000=0.667*100 = 66% LTV. 

If you have a Mortgage of £200,000 and your property is valued at £190,000. Unfortunately, you are in 'negative equity' and your LTV is as follows:

£200,000/£190,000=1.05*100 = 105% LTV.  

Negative equity occurs when your Loan amount exceeds the value of your property. This can occur if property prices fall.

Further examples:

What causes Loan to Value to change?

There are two reasons why Loan to Value (LTV) can change:

House prices changing

House prices are always changing, which means that your Loan to Value ratio can fluctuate as well. Without an official property valuation, you may have to rely on local agent estimates, which can be provided online based on recent sales data of similar sized properties in your area.

Online estimates of your property's value are not official valuations, but can give you an idea of your Loan to Value. Discuss these estimates with your adviser before submitting your mortgage application.

Interest added to your loan

Mortgage interest accrues daily or monthly. When you make a repayment, you back part of the loan. The Interest that accrues on your Mortgage and your monthly repayments cause the outstanding figure to change daily.

For an estimation of your Loan to Value figure, you can use your Mortgage lender's app, which updates figures at least twice monthly. To obtain an exact figure, a redemption statement from your lender is required.

How does Loan to Value determine your Interest Rate?

Lenders want to be sure they can sell your property for enough money to repay the debt if they ever have to repossess it. This is why it is preferred that borrowers put down a higher deposit, or have a lower Loan to Value.

By putting down a higher deposit or having a lower Loan to Value, you reduce the risk for the lenders who are investing in your property. This means that they have a higher chance of getting back the money they lent to you, even if they need to repossess your property.

As a result, the banks view your mortgage application as less risky and may offer you a cheaper interest rate. 

To determine which Interest rate you can be offered, your Loan to Value is considered. 

Generally, the lower the LTV, the cheaper the interest rate you can be offered. This is normally the case until you reach 60% or less LTV when the rate does not reduce further. This is also the equivalent of putting down a 40% deposit.

Loan to Value Brackets

Lenders use loan to value brackets to assign interest rates based on the LTV range of your mortgage. For instance, a loan to value bracket of 90-95% might have an interest rate of 4.29%.

If your LTV is 75%, you may be in a different LTV bracket of 70-80% and that may provide an Interest rate of 4%.

For example:

The table shows how Loan to Value brackets will provide a different Interest rate, per bracket. Interest rates should fall as the Loan to Value bracket decreases.

How can Loan to Value impact your Mortgage repayments?

The Interest rate you repay on your Mortgage is determined by the Loan to Value of your Mortgage. If you reduce your Loan to Value, you may be able to bring your Mortgage into a new bracket with a lower LTV range and a lower interest rate. By having a lower interest rate, providing you do not make amends to your term, you will be able to reduce your monthly repayments. Alternatively, you can reduce your term, keeping your repayments the same and aim to pay less interest over the course of the full Mortgage term.

Improving your Loan to Value

Want to improve your Loan to Value? You have two options: reduce the amount you owe on your mortgage or increase the value of your property. Overpayments can reduce your outstanding balance while home improvements can increase your property's value.

How to use Loan to Value to your advantage when Remortgaging

• If you are Remortgaging when house value has increased, look to bring your Mortgage into the lowest LTV bracket achievable. By doing so, you will get the best Interest rate terms and the potential to save money with your repayments. 
• As Remortgaging requires a fresh property valuation, it provides an opportunity to ensure you obtain a true reflection of the value. Insist on one if you are not happy with the valuation.
• When you apply for a mortgage, you might have to tell the lender how much your property is worth before it's officially valued. If the official valuation comes back lower than what you estimated, your loan-to-value ratio could end up being higher, which means a higher interest rate. Lenders rarely say that your property is worth more than what you've estimated, so it's important to be accurate with your estimate to avoid a higher interest rate.
• Discuss with your Mortgage adviser what the interest rate is for the next LTV bracket. This way, you can decide on which property valuation estimate to use and potentially lower your interest rate. Working together with your adviser can help you make an informed decision. Consider this when applying online, as you won't have the benefit of in-person advice. Without consulting an adviser, you might miss out on knowledge of the lower brackets that could have led to a less expensive loan.

What does 70% Loan to Value mean?

70% loan to value means you have an outstanding mortgage that is 70% equal to the value of your property. 70% is an average Loan to Value ratio. Anything below 60% secures the best interest rates as this is considered the lowest risk for the lenders.

How do you find the best Loan to Value brackets?

To get the best interest rates on your mortgage, you need to find the lowest Loan to Value (LTV) bracket possible. This requires researching different lenders, which can be time-consuming and result in multiple applications. Seeking advice from a Whole of Market Mortgage adviser can save you time and help you find the best mortgage available.

They can consider your estimated LTV bracket and provide advice on how to bring it down, such as making overpayments or increasing your property valuation. This advice can make a big difference in reducing your monthly repayments.

If you choose to remortgage online without speaking to an adviser, you may miss out on this important information and potential savings.

If you're unsure on where to start seeking mortgage advice, you can use the Sunny Fact Find. The answers you provide help us to find you the best-suited adviser. Your adviser then contacts you for a no-obligation conversation on how they can help. You decide how to proceed.