A Guide to LTV for First-Time Buyers
6 minute read
If you are shopping around for your first mortgage, you’ll have noticed that mortgage product literature and best-buy tables often refer to “loan to value” or LTV. Here, we’ll take a look at what LTV is, how it can affect the amount you borrow, and other factors that you should consider.
What is LTV?
LTV is the loan-to-value ratio of a mortgage, expressed as a percentage. For example, imagine you are looking at buying a house for £200,000, and you have saved a deposit of £30,000 – that’s 15% of the total value of the property. You would then need to take out a mortgage for £170,000. The loan-to-value ratio in this case would be 85%.
How do I calculate my LTV?
It’s as simple as dividing the amount you borrow on a mortgage by the total value of the property, then multiplying by 100 to express the figure as a percentage. Let’s look at the example given above, where a mortgage of £170,000 is being taken out to buy a property worth £200,000. In this case:
£170,000 ÷ £200,000 = 0.85
0.85 x 100 = 85% LTV
What Are the Most Common LTV Ratios?
All lenders have a maximum LTV limit on their mortgage lending, and most also have an LTV band or tier system determining the pricing of their mortgage products; in other words, having a bigger deposit (and therefore a lower LTV) will usually give you access to the best mortgage rates.
Maximum LTV limits for lenders are typically in the range of 85%, 90% or 95%. A small number of 100% mortgages are available, but these tend to be more specialist lending products (for example, family assisted mortgages). At 60% LTV you will usually have access to the best range of mortgage deals. Certain types of mortgage borrowing – for example, buy-to-let mortgages – may have a lower maximum LTV of around 60% or 70%.
Why Does LTV Matter?
Firstly, a lender’s maximum LTV will affect how much money you will be able to borrow in total. For example, if the lender only offers mortgages up to 90% LTV and you want to buy a property valued at £200,000, then you will be able to borrow a maximum of £180,000. This limit would still apply to this property even if your income indicated you could borrow more.
The LTV will also affect what mortgage deals you have access to. For example, the mortgage deals at 85% and 90% LTV will not be as competitively priced as those available at 60% LTV. This means that, in general, the larger the deposit you have available, the better the interest rate you will be able to secure.
What Are The Pros and Cons of a Higher or Lower LTV?
Saving a large deposit isn’t always easy, and a high LTV mortgage may be the best option for some would-be homeowners to get a foot on the property ladder more quickly. On the other hand, interest rates on high LTV mortgages aren’t always attractive, and for some people it makes more financial sense in the longer term to save a larger deposit and opt for a lower LTV mortgage.
Conversely, lower LTV mortgage products tend to be better priced than higher LTV deals, meaning that you can save more money over the term of the mortgage due to the lower interest rate. However, many people struggle to save the deposit for a low LTV mortgage – particularly first-time buyers. On a £200,000 property, for example, this could mean the difference between saving £20,000 to qualify for a high LTV mortgage (90%) and £80,000 to qualify for a low LTV mortgage (60%).
How I Can I Avoid a High LTV?
There are two ways you can potentially avoid having to opt for a high LTV mortgage. The first is, quite simply, to save a bigger deposit. In practical terms, this might mean delaying your property purchase to allow yourself more time to build a deposit. While this might not appeal to some, it’s important to remember that qualifying for a better interest rate on a lower LTV mortgage has the potential to save you money in the longer term.
The second option is to consider looking at properties with a lower asking price. Let’s take the example earlier where the buyer has a £30,000 deposit and is considering a £200,000 property, taking out a £170,000 (85% LTV) mortgage. If the buyer were instead to put that £30,000 deposit towards a more modest £120,000 property, then in that case the mortgage would be £90,000 – that would be 75% LTV, potentially allowing access to more attractive mortgage rates.
What Happens If My Property Decreases in Value?
Although we’ve mainly been looking at LTV from the perspective of a first-time buyer, it can also come into play after you buy a property, for example when you want to sell your home, or if you ever want to remortgage to another lender to take advantage of a better mortgage deal.
For many years it was taken as read that, in general, as you repaid a mortgage over its term, the property itself would also increase in value, meaning that the equity – the percentage value of your property which is mortgage-free – increases over time.
However, there have been periods where house prices have dropped – for example, due to either national or local economic factors, which can decrease the equity and therefore increase the LTV. If the LTV increases over a certain amount – for example 90% or 95% – you may potentially find it difficult to remortgage.
In the worst-case scenario, a sharp or long-term drop in the value of the property could mean you owe more on your mortgage than the property is actually worth. This situation is called negative equity. This can prevent you from selling your home, as you owe your lender more than you will get from the sale of your home.
For most people with negative equity, the only option is to wait it out until either the value of the property rises again, or the mortgage is paid down enough to get back into positive equity. Where finances allow it, it can sometimes make sense to either overpay or make periodic lump-sum repayments to the mortgage to bring the loan amount back under the property value.
How Just Mortgage Brokers can help
Here at Just Mortgage Brokers, we have access to lenders and mortgage deals from across the lending market. Whether you are looking for a high LTV or low LTV mortgage, contact us today to discuss how we can help you find the deal that’s right for you.