Loan To Value (LTV) Explained

Loan to value, or LTV, is something we talk about often when discussing mortgages. But what does LTV actually mean? It’s one of those three-letter-acronyms that comes up a lot in the world of property investment and can sound pretty intimidating, but it’s really not – in this blog, we will discuss what exactly LTV means, what is considered a ‘good’ LTV, how the LTV of a property can affect the mortgage and more.

Table of Contents

What Does LTV Mean?
How to Calculate the LTV
What is a Good Loan to Value Ratio?
Does LTV Affect How Much I Can Borrow?
Does LTV Matter When Remortgaging?
How To Decrease Your LTV

What Does LTV Mean?

LTV, or loan to value, refers to the ratio between the value of the loan, or mortgage you take out to buy a property and the value of that property as a whole. LTV is expressed as a percentage. The LTV is a useful metric as it helps determine the risk a lender takes when providing a mortgage to a buyer. Mortgage lenders will usually offer the best deals on their mortgages to buyers with lower LTVs, as they are borrowing less money. The amount of deposit you can provide when buying a property, and the price of said property, determines the LTV.

How to Calculate the LTV

It’s very simple to calculate the LTV ratio – all you need to know is the value of the property you are going to buy, and the amount of deposit you can provide. Say, for example, you want to purchase a property with a value of £200,000 and you can provide a deposit of £20,000, then your LTV ratio is 90%. You can provide 10% of the value of the property so the mortgage lender would need to provide the remaining 90%. If you could provide a deposit of £50,000 for the same property, then the LTV would fall to 75%, as you are providing 25% of the property’s value. The formula for calculating the LTV is pretty simple, see below:

loan required/property value X 100 = LTV

Example:

150,000 ÷ 200,000 = 0.75

0.75 X 100 = 75%

What is a Good Loan to Value Ratio?

A loan with a lower LTV is considered to be better, as the mortgage lender is taking on less risk by providing the loan. If the buyer is covering 20% or more of the cost of the property and the LTV is 80% or less, then if they default on the mortgage, the mortgage provider will be in a better position to reclaim their money from the sale of the house, as they only need to make 80% of the value back. This is why lenders prefer a lower LTV. Buyers too can benefit from a lower LTV, as they will have to borrow less money and can enjoy lower interest rates, more favourable terms, and pay off the loan faster.

Other factors can affect the mortgage deal buyers can access, for example, having a good credit history and being a high earner can also make a difference in the mortgage and interest rate they will be offered. It is always beneficial to have as large a deposit as you can manage, so if that means saving up for a while before buying a property, it is worth it.

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Does LTV Affect How Much I Can Borrow?

In a word, yes, although LTV has a more significant effect on the type of mortgage deal you can access, the interest rates you will be offered, and the overall borrowing costs will be lower if you have a low LTV. Some lenders will only agree to a mortgage if the LTV is under a certain amount, usually 90% or less. There is such a thing as 100% mortgages, i.e. Skipton Building Society and their ‘track record’ mortgage. First-time buyers who have been previously renting and have paid their rent on time, in full for 12 months or more, and have a good credit rating can access this mortgage, although, at the time of writing, Skipton Building Society is the only lender to offer such a deal.

Does LTV Matter When Remortgaging?

It is important to remember that your LTV will reduce over time as you pay off more of the mortgage and build equity in the property. You may also enjoy a lower LTV thanks to the value of the property increasing, which does make a difference when it comes to remortgaging. Depending on the type of mortgage product you choose, you do get the chance to negotiate after a fixed period of 5 years or more, which means you can get more favourable terms, lower monthly repayments, or a lower interest rate. If you are remortgaging to unlock equity in the property for reinvesting, then a lower LTV can help with this too. Here is an example:

Sarah purchased a property five years ago for £200,000, taking out a 75% LTV mortgage of £150,000. Over time, she has repaid £20,000, reducing her mortgage balance to £130,000. Meanwhile, the property’s value has increased to £250,000.

Now, when Sarah remortgages, her new LTV is:

£130,000 ÷ £250,000 = 52% LTV

Because she now has a lower LTV (52% instead of 75%), she qualifies for a better mortgage deal with a lower interest rate. This reduces her monthly payments. If she had stayed at a higher LTV (e.g., above 75%), she might have faced higher rates and stricter lending criteria, limiting her remortgage options.

How To Decrease Your LTV

The obvious way is to provide more deposit, but if that’s not possible, there are other things you can do to get the lowest LTV possible on a property you already own. Try your best to get a higher valuation figure by doing as much as you can to show the property in its best light to the valuer – have them come to the house and see the interior instead of relying on databases and the internet to base the valuation on. If other similar properties in the area have recently sold for a large amount, make sure the valuer is aware of this, as these comparisons can be helpful when determining the value of your property.

LTV is a huge factor when obtaining a mortgage that can affect the interest rates and mortgage products offered to you, especially when remortgaging or renegotiating your mortgage with the same lender. Having a lower LTV helps you unlock the property’s equity, especially if the property value has increased due to market factors or renovations you have undertaken yourself. Keeping an eye on your LTV as it reduces over time can help put you in a stronger financial position, which is ideal for making other investments.

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