LTV (or loan-to-value) refers to the percentage of a loan that is underwritten to the value of an asset that is purchased. Loan-to-value is most often used by banks and building societies to represent the amount they are willing to lend against the value of the asset. For example, if a borrower wishes to borrow £190,000 to purchase a house valued at £200,000, the LTV would be 95%.
Below reveals the loan-to-value you would need to apply for the following house valuations.
LTV Table Examples
|LTV||£50k Property Value||£100k Property Value||£150k Property Value||£200k Property Value||£250k Property Value|
|Amount borrowed at: 100%
|Amount borrowed at: 95%
|Amount borrowed at: 90%
|Amount borrowed at: 85%
|Amount borrowed at: 80%
|Amount borrowed at: 75%
|Amount borrowed at: 70%
|Amount borrowed at: 65%
|Amount borrowed at: 60%
If you were interested in a property valued at £150,000 and had a deposit of £7,500, you would apply to borrow the remaining £142,500, which, as we can see from the table above, reflects a 95% LTV mortgage.
If you were interested in a property valued at £200,000, and you had £20,000 available for a deposit, you would need to apply for an 90% LTV mortgage worth £180,000.
Be sure that you factor stamp duty into your calculations! (Find out more about stamp duty here). If you are purchasing property worth between £125,000 and £250,000, you will face a fee of at least 1%. This can be added to the mortgage, but it may push you onto the next tier of LTV loan (e.g. from 90% to 95%), which is likely to be a little more expensive.
Why LTV Matters: The Relationship with Cost
Higher LTV mortgages tend to be more expensive (higher interest rates) than lower LTV loans, due to the extra risk that a higher LTV mortgage imposes upon lenders.
For example, an 90% mortgage may have an interest rate of 4.5%, whereas a 95% mortgage might have an interest rate of 5%, meaning that monthly payments will be higher, if all else remained the same.
What Are The Risks?
If you take out a tracker mortgage, a rise in the base rate will lead to higher monthly payments. This is more of a risk for high-LTV mortgage holders where repayments are already higher.
Before taking out a tracker mortgage at 95% LTV, it might be worth contemplating what your costs might be if rates do head upwards. See our calculator: what if rates change?
Rise and Fall in Value
Any rise or fall in the property value will increase or reduce the value of your deposit (as a overall percentage). Given a 95% LTV mortgage and a 5% deposit, should your home value fall by 5% it would technically eliminate your deposit.
In a worst-case scenario, your home value could drop by more than your deposit, leaving you in negative equity. Should you then sell your home, you would not make enough back to pay of your mortgage. This will make getting another mortgage deal more challenging.