Loan-to-Value (LTV) is a simple yet crucial concept in finance. It represents the ratio of a loan amount to the appraised value or purchase price of an asset, such as a home or car. LTV is expressed as a percentage, with a higher percentage indicating a larger loan relative to the value of the asset. Lenders use LTV to assess the risk of a loan, with higher LTV ratios generally considered riskier as borrowers have less equity in the asset.
Lenders often charge higher interest rates for mortgages with higher Loan-to-Value (LTV) ratios, as they are taking on more risk due to the borrower having less equity in the property. LTV intervals typically vary among lenders and are often set at 5% increments, with common thresholds at 95%, 90%, 85%, 80%, 75%, and 60%. It’s worth noting that once the LTV drops below 60%, the interest rates may not further improve, although some lenders may have 50% as their optimum threshold.
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Mortgage providers may allow you to borrow more with a lower Loan-to-Value (LTV) ratio. For instance, borrowing is often restricted to around 4.5 times income at higher LTVs, such as 95%. However, with a lower LTV, such as 90% LTV, you may have a better chance of securing a higher income multiple, typically around 4.75 times or even over 5 times income at 75% – 85% LTV. It’s important to note that there can be exceptions to this, and securing higher income multiples with lower deposits can be more challenging. The specific multiples offered would depend on your individual circumstances.
Some mortgage providers may have specific restrictions on Loan-to-Value (LTV) ratios based on borrower types or circumstances. For example, lending on new build flats may be limited to 75-85% LTV by many mortgage lenders. Similarly, if you have adverse credit, your options may be limited to lower LTVs, as most adverse credit lenders do not lend above 85% LTV. Additionally, if you’re not a UK national, you may also face restrictions on certain LTV limits based on your residency status. It’s important to be aware of these potential limitations when seeking a mortgage.
Mortgage lenders often have different credit check threshold requirements based on the Loan-to-Value (LTV) ratio. Generally, lenders may have more lenient credit check requirements for lower LTVs, which means borrowers may have a better chance of passing the credit check. On the other hand, higher LTVs may come with more stringent credit check requirements, making it potentially more challenging for borrowers to meet the lender’s criteria.
There is no set definition of a “good” Loan-to-Value (LTV) ratio; however, with most lenders, a 60% LTV tends to be the threshold for the best interest rates available. At 75% LTV, you will generally meet the same lender criteria requirements as you would with a 60% LTV. Ultimately, the lower the LTV, the better, but there are often still plenty of great deals available at 80-85% or even 90% LTV that are comparable to those offered with lower LTVs.
The calculation for Loan-to-Value (LTV) is as follows:
LTV = (Loan Amount / property value or Purchase Price) x 100
Dividing the loan amount by the property value or purchase price and multiplying by 100 gives you the LTV percentage, which represents the proportion of the property’s value that is financed by the loan.
The calculation for Loan-to-Value (LTV) remains the same for a remortgage as it does for a purchase. The property value used in the calculation will be based on the current appraised value, which may require a new valuation to be conducted, rather than the original purchase price.