LTV works as a percentage of the value of a property which a lender is willing to lend to an applicant. To give an example, if an applicant had 30% of the value of a property which they could offer as a deposit, the lender could offer them the remaining sum to purchase it through an 70% LTV mortgage.
There is a variety of eligibility criteria and a range of different LTVs which are available to those looking to borrow. Below, we have provided information on the essential aspects of LTVs, including how to calculate which one would be best for each individual applicant, which LTVs are the best and why they could be important.
Why is an LTV Important?
LTV is important as it is representative of the percentage of the total value of a property or asset that a lender is willing to loan. In order to decide which LTV to borrow, there are various factors which an applicant should consider. These factors include affordability, the amount they are able to provide via deposit, and the risks associated with a lender loaning the applicant an LTV.
The higher the LTV is, the greater the risk for the lender. If they are to provide a borrower with a high LTV mortgage but the borrower cannot make the repayments, the lender will make back less money. They may also have to sell the house the loan is secured onto.
Consequently, the lower the LTV is, the less risk there is for the lender. Lenders therefore usually save their top deals for applicants who are after low LTVs, meaning those with a higher deposit and lower mortgage will have the best offer.
The LTV calculation relates to any kind of property purchase where finance is used, including homes, flats, residential accommodation and commercial property including buildings and offices.
What is an LTV Ratio?
LTV stands for Loan to Value. This is a way to express how much money is borrowed with a specific mortgage or loan in comparison to the total value of the property or asset. The LTV is expressed as a percentage and refers to the percentage of the value of the property or asset which the borrower needs the lender to offer them. The remainder of the property’s value should be paid as a deposit by the borrower.
LTVs are relevant for any type of secured loan, including a bridging loan or homeowner loan - They do not exclusively apply to mortgages.
Which LTVs are Best?
Lower LTVs usually have better deals and are therefore viewed as more ideal mortgages. Higher LTVs are usually considered to be in excess of 80%, and have increased interest rates.
In spite of this, although lowering an LTV can help an applicant to acquire a better deal, when it comes to mortgages options will depend on a variety of factors. These include the value of the property and affordability of the deposit.
There is not a minimum LTVm however the amount which is available differs by the lender, the type of loan and the details of the application.
Types of LTV
70%: this will allow a borrower to loan 70% of the value of an asset or property which the loan is being secured against. For example, if a buyer is looking to purchase a property worth £100,000 and have £30,000 available for this, they could borrow a 70% LTV loan to make up the remaining £70,000 for this purchase, and use the £30,000 as a 30% deposit.
75%: this will allow a borrower to loan 75% of the value of an asset or property which the loan is being secured against. For example, if a buyer is looking to buy a £100,000 property and have £25,000 available to put down on this, a 75% LTV loan would help them borrow the remaining £75,000 to complete the purchase on this property. In this circumstance, the £25,000 would be used as a 25% deposit.
80%: this will allow a borrower to loan 80% of the value of an asset or property which the loan is being secured against. For example, those wanting to buy a £100,000 property and have enough for a 20% deposit (£20,000) can borrow the rest of the money for the purchase (£80,000) via an 80% LTV loan.
85%: this will allow a borrower to loan 85% of the value of an asset or property which the loan is being secured against. For example, borrowing an 85% LTV loan on a £100,000 property means the lender is loaning the borrower £85,000 – the lender having to make up the remaining 15% (£15,000) as a deposit.
90%: this will allow a borrower to loan 70% of the value of an asset or property which the loan is being secured against. For example, on a £100,000 property, a 90% LTV will provide £90,000. The remaining 10% (£10,000) will have to be provided by the borrower in the form of a deposit.
95%: this will allow a borrower to loan 70% of the value of an asset or property which the loan is being secured against. The mortgage guarantee scheme run by the government enables borrowers to apply for a 95% LTV mortgage. This means that the applicant would only be required to put down 5% as a deposit.
Is it Possible to Get a 100% LTV Loan?
It is not common to get a 100% LTV loan, but it is possible. This type of loan does not require a borrower to put down a deposit, as the lender will cover the full price of the property or asset.
In this case, LTV loans usually require a guarantor. This is typically a family member or friend who will assure the lender that their loan will be repaid by them if the borrower cannot make the repayments. For certain bridging loans, 100% LTVs will also be available.
How to Calculate an LTV
In order to calculate an LTV, the available deposit must be subtracted from the total value of the property to indicate how much needs to be borrowed. This figure should then be divided by the total value of the property and multiplied by 100 to provide the correct percentage.
Here, the calculation is split into 3 easy steps:
Total value of the asset - available deposit = amount which needs to be borrowed
Amount which needs to be borrowed / total value of asset = ?
? x 100 = LTV needed
How to Get a Lower LTV
There are a few possible ways to lower an LTV, which can help an applicant access better rates on borrowing options.
One of the ways to do this is to save for a larger deposit, meaning the applicant will need to borrow less money and have access to better deals. Certainly having a stable employment, income and a good credit score will only help your application get approved and at the best terms possible.
Alternatively, if the value of a property rises and the amount covered by the mortgage therefore declines, the LTV will be lower. It is also possible to add value to a property through renovation. House prices typically increasing over time can also help to lower an LTV.
Are LTVs Different on a Bridging Loan?
LTVs are different in regards to a bridging loan as they serve a different purpose to a residential mortgage. Bridging loans help to ‘bridge the gap’ between a purchase and a sale. They help borrowers to complete on properties within a specific timeframe and are used by homeowners, investors, landlords and developers.
The LTV which is offered on a bridging loan is the amount of money which is offered by a lender as a percentage of the total value of the property or asset. A regulated bridging loan provider will not offer an LTV higher than 75%, however unregulated providers may make a higher offer.
Unregulated bridging loans can only be used and secured for properties which are for business or investment. It is not possible to secure an unregulated bridging loan for a residential property.