What is Loan-to-Value (LTV) and Why it Matters in UK Mortgages
When it comes to getting a mortgage in the UK, there is a term you should know: Loan-to-Value (LTV). Knowing what LTV is, how it works, and why it matters can help you understand the entire mortgage process and make an informed decision when you are ready to buy a house. In this blog post, we’ll explain what LTV is and why it is important to consider when applying for a mortgage in the UK.
What is Loan-to-Value (LTV)?
Loan-to-Value (LTV) is a crucial factor in the mortgage process in the UK. It is a measure of the amount of money you are borrowing against the value of the property you are buying. LTV is usually expressed as a percentage, and the higher the percentage, the more significant the loan you are taking out relative to the property’s value.
To put it simply, if the property is valued at £200,000, and you need to borrow £150,000, the LTV ratio will be 75% (£150,000 ÷ £200,000). The remaining 25% is the amount you will need to pay as a deposit.
In essence, LTV reflects the risk that the lender is taking on. The more you are borrowing relative to the property value, the higher the lender’s risk that they won’t recover their money if you default on your mortgage repayments. As a result, lenders will have a maximum LTV ratio that they will offer based on factors such as your credit history, employment status, and the property you are buying.
Knowing your LTV is crucial to determining how much you can borrow and what type of mortgage you will be eligible for. Understanding how lenders calculate LTV and the significance of this measure will help you make informed decisions when you apply for a mortgage.
In the UK, most mortgage lenders offer products with LTV ratios ranging from 75% to 95%, depending on the borrower’s circumstances. Lenders typically provide lower LTV ratios for borrowers with poor credit ratings or those looking to buy properties with a high-risk level. Conversely, borrowers with good credit ratings can get approved for higher LTV ratios, sometimes up to 95% or even 100%.
It’s worth noting that the LTV ratio can also fluctuate if the property’s value changes. For example, if the property’s value decreases over time, your LTV ratio may increase, which could result in higher interest rates or make it more difficult to remortgage. On the other hand, if the property value increases, you may be eligible for better mortgage terms or lower interest rates.
How to Lower Your LTV Ratio to Get Better Mortgage Terms
If you’re looking to get better mortgage terms, one of the things you should focus on is lowering your loan-to-value (LTV) ratio. Here are some ways to do it:
1. Save for a Bigger Deposit: One of the most effective ways to lower your LTV ratio is to save for a bigger deposit. The larger the deposit you put down, the smaller your loan will be, and the lower your LTV ratio will be.
2. Pay Off Debt: If you have any outstanding debts, it’s a good idea to pay them off before applying for a mortgage. Not only will it improve your credit score, but it will also lower your LTV ratio, as you’ll need to borrow less money.
3. Consider a Joint Mortgage: If you’re buying a property with a partner or a friend, you could consider a joint mortgage. This will allow you to pool your incomes and increase the amount of money you can put down as a deposit, thus lowering your LTV ratio.
4. Look for a Cheaper Property: If you’re struggling to save for a bigger deposit, you could consider looking for a cheaper property. The less expensive the property, the lower your loan will be, and the lower your LTV ratio will be.
5. Use a Help-to-Buy Scheme: The UK government offers a range of Help-to-Buy schemes to help first-time buyers get onto the property ladder. These schemes typically require a smaller deposit and can help you lower your LTV ratio.
