Whether you’re looking to buy a new property or applying for a remortgage, it’s important you understand the loan-to-value (LTV) ratio.
Your loan-to-value ratio helps lenders and brokers determine your interest rates and mortgage fees, so if you’re in the housing market it’s important to know what LTV means. Learn how to calculate loan-to-value and use our free calculator to get the results you need quickly and easily.
In this guide, loan-to-value is explained in easy terms:
- What does loan-to-value mean?
- Why is LTV important?
- How to calculate your loan-to-value ratio
- What is a good loan-to-value ratio in the UK?
- How to work out your LTV when remortgaging
How to calculate your loan-to-value ratio
LTV is a percentage figure that reflects the proportion of your home that is mortgaged compared to your equity. To calculate the loan-to-value on a property you are wanting to buy or your current home, you need to follow these steps:
- Find out your mortgage amount.
- Find out the current value of your home.
- Divide your mortgage amount by the value of your home.
- Multiply that number by 100 to determine the percentage.
For example, if your mortgage amount is £225,000 and your property value is £300,000, when you divide £225,000 by £300,000 you get 0.75. Multiply 0.75 by 100 and the result is 75. This means that your LTV ratio is 75% and your deposit (or equity) is 25% (£75,000).
Your home’s LTV ratio will continue to change as you pay off the loan and the property value changes. Just bear in mind that the housing market can go both up and down, so look out for any fluctuations that may impact your LTV for selling or remortgaging.
Use our free loan-to-value calculator below to work out your LTV ratio. Simply add the mortgage or loan amount and your home’s value to get an answer in a few clicks.
Loan-to-Value (LTV) Calculator
Your LTV is: 0%
What does loan-to-value mean?
The loan-to-value ratio is the maximum amount a mortgage lender will consider loaning to you, as a percentage of the property in question.
When you apply for a mortgage, lenders will look at a set of criteria as they assess your application and potentially give you an offer. These include things like your deposit size, income, credit history, and importantly, your loan-to-value ratio.
In order to calculate loan-to-value, you’ll need to know the estimated value of your property and the amount of your mortgage. So, if your property is worth £300,000 and your mortgage is £225,000, the LTV would be 75%. Then, your equity – the amount you own – would be £75,000.
Lenders can also use loan-to-value ratio for other types of secured loan, but it’s most commonly applied to mortgages.
Why is LTV important?
The higher your LTV ratio, the higher the risk is for the lender. If your property’s value drops below the value of your mortgage, or you default on your repayments, the lender stands to make a loss. For this reason, you’ll find mortgage rates are significantly less competitive if you have a high LTV, with higher interest rates and even fees.
Those with a lower LTV pose less risk to the lender as you’ve invested more of your own money, giving you access to a wider range of options and better mortgage terms - including lower interest rates.
What is a good loan-to-value ratio in the UK?
There isn’t really a simple answer to this, as it’s the lender who will decide whether your loan-to-value ratio puts you in their good books. Just remember that the lower your LTV ratio is, the lower your perceived risk and so, the lower your monthly repayments.
Having a larger deposit will give you the benefit of having a lower LTV ratio. Therefore, if you’re able to save up or afford a larger deposit upfront, your monthly mortgage repayments will be lower as a consequence. A good LTV also opens the door to a wider range of mortgage deals from lenders.
What if I have a high LTV ratio?
Having a high LTV ratio isn’t the end of the world. In fact, for some people, it means you can get on to the housing ladder with a smaller deposit. Your credit score may affect whether you can apply for a high LTV mortgage. Often, a lower credit score is seen as a riskier option by lenders and you won’t be offered competitive rates. It’s worthwhile to look for ways to improve your credit score before applying for a mortgage or remortgage if possible.
It’s recently become more common to find high LTV ratio mortgage deals – these are tailormade for people with a smaller deposit. While it’s good news for those getting on the property ladder, high LTV mortgages will typically have higher interest rates compared to standard mortgages. Whether you’re remortgaging or finding your way onto the property ladder, speak with Norton Finance for advice on finding the best rates to suit your financial situation.
How to work out your LTV when remortgaging
When it comes to remortgaging, it’s better to have a low LTV ratio, as it gives you access to a wider range of mortgage options with lower interest rates.
If you are on an interest-only mortgage, your LTV will simply remain the same, as you are only paying interest and not affecting the balance. But, with a repayment mortgage your balance should reduce with each payment, and so will your LTV.
You can follow these same steps as a remortgage LTV calculator:
- Divide your mortgage amount by the value of your home.
- Multiply that number by 100 to determine your loan-to-value ratio as a percentage.
Just remember to use the remaining amount left on your mortgage, rather than the initial loan amount, and check how much the house is currently worth, rather than what you originally paid.
What if my property value changes?
If the property value has increased in this time, you should have a much lower LTV ratio. However, if the property value has fallen, you may owe the lender more than the property is worth. This is called negative equity and can cause issues with remortgaging.
Regular home maintenance will minimise loss of value if house prices go down, while significant home improvements could add value to your property - both lowering your LTV ratio and boosting your equity for when you need to remortgage.
FAQs
What is the formula for loan-to-value?
To calculate loan-to-value, you’ll need to divide the mortgage amount by the estimated value of the property. Multiply the result of this calculation by 100 to work out your LTV ratio. Remember to use the most up to date figures for the house value and remaining mortgage amount if you are remortgaging.
What does 80% loan-to-value mean?
An 80% loan-to-value ratio means that 80% of your home’s estimated value is on the mortgage. For example, 80% loan-to-value would be the case if the property is valued at £200,000 and you have a deposit of £40,000. So, your mortgage would be worth £160,000, which is 80% of the property’s value.
How do you calculate loan-to-value ratio in Excel?
Using Excel can be a good way to keep record of the LTV ratio if you are comparing different options.
- Start with columns A and B. Write “estimated property value” in cell A1, and “mortgage amount” in A2.
- In the next column across (B), write the values. For example, “estimated property value” could be “180,000” in cell B1 and “mortgage amount” could be 150,000 in cell B2.
- Divide the number in the cell B2 by the number above in cell B1 to calculate loan-to-value.
At Norton Finance we specialise in remortgaging, and can help you to achieve the right rate, putting you in touch with the most affordable providers. Get in touch today.
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