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What Does LTV Mean?

April 1, 2022 By Mortgage Light Leave a Comment

Loan-to-value, otherwise known as ‘LTV’ is a phrase that you’ll quite often hear used within the housing and mortgage market. It’s something that lenders look at when assessing the level of risk attached to any secured loan they may be considering offering. It will often drive the level of interest rate being charged.

It’s an important part of the mortgage process, but what does LTV actually mean? In this article, we explain everything you need to be aware of regarding loan-to-value.

What does LTV mean on a mortgage?

In the mortgage world, LTV is a calculation used by lenders use to describe the relationship between the outstanding mortgage balance and the market value of a property. It refers to the percentage of your property’s market value that is being funded by your mortgage.

For instance, let’s say you put down a 20% deposit on a property. You take out a mortgage to cover the remaining 80%. Your LTV ratio would be 80% because 80% of your home is being paid for by your mortgage.

The higher the LTV, the higher the risk profile for the lender. This is because, in the event of you defaulting your mortgage for any reason, a higher LTV means there is a smaller buffer between what is owed on the mortgage and what the market value of the property might be.

mortgage light advisor explaining LTV

Your LTV ratio will change over time. This is often a result of you paying down your mortgage borrowing each month. This reduces the mortgage amount against the property value. It may also change as a result of the market value of your property changing. A rise in the value of your house will reduce the percentage of your property funded by your mortgage. As a result, it will reduce your LTV.

For example, a £200,000 house with a £160,000 mortgage will have a loan-to-value of 80%. If the market value of the property increases to £220,000, and the mortgage remains at the same level, the LTV will reduce to around 73%. Remember, however, that houses values can go down as well as up. A fall in your property’s market value could result in the LTV increasing.

How does LTV affect interest rates?

To compensate lenders for the higher risk associated with providing higher LTV mortgages, these mortgages generally attract a higher interest rate. Similarly, mortgages with lower LTVs are usually offered at lower interest rates. This means that it can be much cheaper to borrow the same amount of money if there is a lower LTV.

Are higher LTV mortgages really more risky to the lender? Well, think about it this way. A home bought with a 90% mortgage would only have to lose 11% of its value to go into negative equity. This is where the market value of the property isn’t sufficient to cover the balance outstanding on the mortgage. As a result, if the lender were to have to repossess the property for any reason and then sell it to try and recoup the amount outstanding on the mortgage, the sale proceeds wouldn’t be enough to get all of their money back.

two dice depicting interest rates

Lenders also know from experience that properties that get repossessed tend to have suffered neglect for some time prior to this. Very often, they fail to reach their full market value at auction. As a result, the reduction in value seen in such properties will see them not get all their money back.

A lower loan-to-value mortgage of 60% however, means that the market value of a property can fall by over a third before the lender faces any real risk of loss. This is why lenders save their more attractive mortgage deals for customers with lower LTV borrowing.

Find out more – ‘How much interest am I paying on my mortgage?’

How to calculate LTV

LTV is expressed as a percentage. It is calculated by dividing the value of the mortgage outstanding by the value of the property. There are plenty of online LTV calculators to help you do this.

Let’s say for example that you wish to purchase a house for £200,000. You intend on putting down a 20% deposit of £40,000. To complete the purchase, you will need a mortgage of £160,000. By dividing the required mortgage (£160,000) by the property value (£200,000) and then multiplying by 100, you get the LTV which is in this case 80%.

What is a good LTV?

So, we now know that low loan-to-value mortgages are generally preferable and often come with lower interest rates. High LTV mortgages are considered higher risk and often come with higher interest rates. But what exactly is considered low and high for LTV?

As a general rule, anything below 80% LTV is considered low. Anything higher than 80% is considered high. For that reason, it’s a good idea to try and put down at least a 20% cash deposit. Of course, this can be difficult for first-time buyers. It’s not uncommon to have a higher LTV mortgage when you purchase your first property. As you build up equity in your property, you could then look to move on to lower loan-to-value deals later on.

mortgage light meeting

For first time buyers, it can still be worth taking on the more expensive higher loan-t0-value borrowing just to take that first step onto the property ladder. After all, house prices might be going up faster than the value of your savings! If you start off with a high LTV mortgage, then you can always look to remortgage onto a cheaper facility later, once you have seen your LTV start to reduce as a result of either house price rises or your borrowing reducing (or most commonly, a combination of both).

 

Got more questions about LTV? Just give us a shout! Our friendly and experienced mortgage advisors would be happy to help you. Contact us via our website or call 01908 597655.

Filed Under: Getting a mortgage, Managing your mortgage Tagged With: getting a mortgage, interest, interest rates, loan to value, LTV, managing your mortgage, mortgage advisor, mortgage advisor and broker, mortgage broker, mortgage interest, mortgage light

How to Get The Best Rate on a Mortgage

December 24, 2021 By Mortgage Light Leave a Comment

The UK finance market offers a broad range of mortgage products to borrowers. The interest rate charged on those products can vary quite widely for different borrowers. Generally, the interest rate charged by a lender is a reflection of their view of the risk the borrower poses and the scale of loss the lender might run into should that happen.

As a result of these different risk profiles, some of the preferential deals that may be available to one borrower may not be available to another – and vice versa. So, what are some of the factors that affect the interest rate that you may be offered on your mortgage and how can you get the best rate for your personal circumstances? [Read more…]

Filed Under: Getting a mortgage, Managing your mortgage, Remortgaging Tagged With: bad credit, Bank of England, bank of england base rate, base rate, credit score, deposit, employment, getting a mortgage, help to buy, help to buy equity loan, help to buy equity loan scheme, help to buy scheme, house deposit, interest, interest rates, joint mortgage, joint mortgage application, loan to value, LTV, managing your mortgage, mortgage deposit, mortgage guarantor, rates, remortgage, unemployment

Mortgage Costs Increase – Now is Time to Act!

November 4, 2021 By Mortgage Light Leave a Comment

It’s been an eventful few weeks in the mortgage world, with Rishi Sunak’s announcement of the Budget 2021, mortgage rates on the rise and inflation increases all dominating the financial press.

So, what does all this mean for our Mortgage Light customers? We’re here to explain all. [Read more…]

Filed Under: Managing your mortgage, Remortgaging Tagged With: Bank of England, base rate, Budget 2021, energy crisis, fixed-rate, fixed-rate mortgage, inflation, interest, interest rates, managing your mortgage, mortgage interest, mortgage rates, remortgage, remortgaging, standard variable rate, SVR, The Budget, The Budget 2021

How Much Interest am I Paying on my Mortgage?

October 21, 2021 By Mortgage Light Leave a Comment

Most mortgages these days are standard capital and interest repayment mortgages, also known as ‘repayment mortgages’. This means that each month you repay all of the interest charged on your borrowing for the month, plus a small amount of the capital that you originally borrowed.

Over the term of your loan, you will eventually repay all of the capital you borrowed via your monthly repayments so that your loan is fully paid off. The interest that you pay each month is effectively the fee you pay to your lender in return for borrowing the capital from them. It is how lenders make their profit. [Read more…]

Filed Under: Managing your mortgage Tagged With: amortization, Bank of England, base rate, fixed-rate, fixed-rate mortgage, interest, interest rates, interest-only mortgage, managing your mortgage, mortgage interest, repayment mortgage, standard variable rate, SVR

What Happens to my Mortgage if I Lose my Job?

July 26, 2021 By Mortgage Light Leave a Comment

If you are in employment and have a mortgage, it’s probably safe to say that you rely on your monthly wage to meet your mortgage repayments and keep the roof over your head. So, what happens to your mortgage if you lose your job and therefore your income?

Losing your job can be a real shock that can turn your finances upside down. If you do find yourself in this situation and you are worried about how you can continue to pay your mortgage, there are temporary solutions out there to help you get by. [Read more…]

Filed Under: Managing your mortgage Tagged With: extending your mortgage term, government support, managing your mortgage, mortgage arrears, mortgage payment holiday, repossession, SMI scheme, support for mortgage interest scheme, unemployment

Different Types of Mortgage

June 9, 2021 By Mortgage Light Leave a Comment

Once you begin looking for a mortgage, you’ll come to realise that there are many different types of mortgages out there on the market. It can quickly become confusing. However, there are essentially two main types of mortgages: fixed-rate and variable-rate mortgages.

In this guide, we are going to explain how each of these mortgage types work. We will also cover other common types of mortgage and some specialist mortgages that you may come across.

[Read more…]

Filed Under: Getting a mortgage, Managing your mortgage Tagged With: bad credit mortgage, buy-to-let mortgage, capped rate mortgage, discount mortgage, first-time buyer, fixed-rate mortgage, getting a mortgage, guarantor mortgage, help to buy, help to buy equity loan, help to buy mortgage, high net worth mortgage, interest-only mortgage, managing your mortgage, offset mortgage, repayment mortgage, shared ownership, shared ownership mortgage, specialist mortgage, standard variable rate, SVR, tracker mortgage, variable-rate mortgage

What Happens to Your Mortgage When You Move?

May 11, 2021 By Mortgage Light Leave a Comment

When you move house, you may have the option of taking your current mortgage deal with you to your new property, known as mortgage porting. If you choose not to take up this option, or it isn’t available to you, then you will need to repay your existing mortgage deal from the sale proceeds of your house and take out a new mortgage to help you buy your next property. You can do this with either your existing lender or with a new one.

It’s important to note that mortgage porting only applies where you currently have some sort of special mortgage deal. This could be a fixed interest, tracker or discounted rate facility with your existing lender. It does not apply where you have a standard variable rate facility.

[Read more…]

Filed Under: Managing your mortgage Tagged With: managing your mortgage, mortgage porting, moving house, purchasing a home, purchasing a house, purchasing a property, selling a house, selling a property, selling your home, selling your house, selling your property

Mortgages and Divorce

March 18, 2021 By Mortgage Light Leave a Comment

Going through a divorce or legal separation can be a very difficult and stressful process, even if the separation is amicable between both parties. Untangling personal finances and separating joint assets fairly can be tricky and is often far from straightforward, particularly if you own significant assets such as the matrimonial home. This can be even more difficult and contentious where there are dependent children involved in the relationship. The decision on how to deal with the family home will, in most cases, have an impact on these children in many ways.

Unfortunately, 42% of marriages end in divorce, however one consequence of this statistic is that mortgage lenders are familiar with these types of situations. There are generally options available to you when it comes to refinancing an existing joint mortgage on the family home or getting a new mortgage facility to buy a new home.

[Read more…]

Filed Under: Managing your mortgage Tagged With: divorce, managing your mortgage, mortgage guarantor, selling a house, selling a property, selling your home, selling your house, selling your property

Extending Your Mortgage Term

March 11, 2021 By Mortgage Light Leave a Comment

If you have a standard repayment mortgage, you may be able to reduce your monthly payments by extending your mortgage term. Your mortgage term is the length of time that you have agreed to fully repay your mortgage within. The term will have been agreed with you at the time you originally took your mortgage out, or last remortgaged it.

For a long time, a 25-year mortgage term was the standard go-to option. In recent years, however, as the size of the average mortgage has increased, there has been a move towards longer repayment terms in an attempt to make the higher borrowing needed to buy a property more affordable. In fact, data suggests that the number of first-time buyers opting for a mortgage term of between 35 and 40 years has doubled over the past decade.

So, how does extending your mortgage term affect your payments, and is it something you should consider?

[Read more…]

Filed Under: Managing your mortgage Tagged With: extending your mortgage term, interest rates, managing your mortgage

What is a Fixed-Rate Mortgage?

December 22, 2020 By Mortgage Light Leave a Comment

A fixed-rate mortgage is a mortgage product where the fixed interest rate is guaranteed to stay the same for an agreed fixed period. It pretty much does what it says on the tin! Unlike with a variable rate style mortgage, you’ll know exactly how much you’ll need to repay each month during the agreed fixed period. [Read more…]

Filed Under: Getting a mortgage, Managing your mortgage Tagged With: fixed-rate mortgage, getting a mortgage, interest rates, managing your mortgage, standard variable rate, SVR

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All of our brokers deal with the whole of the mortgage market. It doesn’t matter what the question or when you want to speak to us, we have brokers available on the phone or face to face seven days a week. Whether you are just thinking of buying a home and have no idea where to start, a seasoned investor or someone looking to better your current mortgage product, we are happy to help andchat over ideas free of charge.

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