The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset.
The asset is usually a property, such as a home, purchased with the loan.
The ratio is expressed as a percentage and is usually written as “loan-to-value ratio” or “LTV.”
In short, it measures the loan amount against the value of the property.
“Negative equity” refers to when the loan amount is greater than the property or asset value.
The LTV ratios are one factor that mortgage lenders use to assess risk when considering a loan application.
A high LTV ratio means that the borrower has a smaller equity stake in the property, which makes the loan riskier for the lender.
If the borrower defaults on the loan, the lender will have a more challenging time recovering the entire loan amount since there will be a smaller equity buffer.
Conversely, a low LTV ratio means that the borrower has a more significant equity stake in the property, which makes the loan less risky for the lender.
If the borrower defaults on the loan, the lender will have an easier time recovering the total loan amount.
For instance, let’s say a lender provides a loan of £500,000 to a borrower to purchase a property worth £1,000,000.
The loan-to-value ratio in this instance would be 50%. The loan is financing half the value of the property.
This is generally seen as a low-risk loan since the borrower has a lot of equity in the property. If the same borrower wanted to take out a loan for £750,000, the loan-to-value ratio would be 75%.
Where Can LTV be Applied?
Mainly, LTV is applied to mortgages; however, any type of loan where the property’s value is used as collateral can have an LTV ratio.
For example, LTV is also used for Lombard Loans, where a loan may be secured against stock market investments or bonds. This type of lending can be facilitated via Private Banks.
The loan-to-value ratio is just one-factor lenders use when considering a loan application.
Lenders will consider other factors, including the borrower’s credit history, employment history, and income.
What is a Good LTV Ratio?
There is no set answer to this question since every lender has different standards.
Some lenders may be willing to lend money to borrowers with a high LTV ratio, while others may only lend money to borrowers with a low LTV ratio.
It all depends on the lender’s risk tolerance.
A good rule of thumb is to keep your LTV ratio below 85%, meaning that you should have at least 15% equity in the property before taking out a loan.
For example, if you buy a house for £1,000,000, you should have at least £150,000 saved for a deposit.
This would give you a loan amount of £850,000 and an LTV ratio of 85%.
Some lenders may be willing to lend you money with a higher LTV ratio, but you will likely pay a higher interest rate.
The larger the deposit or equity amount, the better the lending terms. However, some lenders specialise in lending at higher LTVs.
What If My LTV Ratio is Too High?
If your LTV ratio is too high, you may not be able to get a loan from a traditional lender, or if you do, it will be more expensive.
You may be able to get a loan with a high LTV ratio if you are willing to pay a higher interest rate or if you have a good credit score.
Most lenders will not lend more than 95% LTV.
One option is to wait and save up more money for a deposit so that lower LTV terms can be obtained.
Alternatively, suppose you are deemed to be in a professional job or have high earnings. In that case, some lenders will go out of their way to provide high LTVs as they anticipate your earnings will quickly rise and enable overpayments to reduce the loan to value over time.
With the use of private banks and specialist lenders, we have access to high loan-to-value solutions for mortgages over £1,000,000.
To find out more, get in touch with us here.
How to Calculate Your Mortgage Loan-to-Value Ratio?
The loan-to-value ratio is calculated by taking the loan amount and dividing it by the value of the property.
The formula is: LTV = (Amount owed on the loan ÷ Appraised value of the asset) × 100
For example, let’s say you want to buy a house for £1,000,000 and have saved up £100,000 for a deposit.
This would give you a loan amount of £900,000.
To calculate the LTV ratio, you would take the loan amount of £900,000 and divide it by the value of the property, which is £1,000,000.
This would give you an LTV ratio of 90%.
As you can see, this is a high LTV ratio and would be considered a high-risk loan by most lenders.
You would likely have to pay a higher interest rate if approved for this loan.
If possible, it is always best to keep your LTV ratio below 75% to get the best interest rate and terms.
How Does Loan-to-Value Ratio Affect Interest Rates?
Lenders use the loan-to-value ratio as one way to determine the risk of a loan.
The higher the LTV ratio, the greater the risk to the lender.
This is because there is a greater chance that the loan will not be fully recoverable in the event of repossession.
In order to offset this risk, lenders will charge a higher interest rate for loans with a high LTV ratio.
For example, let’s say you are approved for a loan with a 4% interest rate.
If your LTV ratio is 90%, you will pay the 4% interest rate.
But if your LTV ratio is 75%, the lender may charge you a higher interest rate, maybe 2.5%.
How to Lower Your Loan-to-Value Ratio?
The best way to lower your loan-to-value ratio is to use a larger deposit.
For example, if you buy a house for £500,000 and have saved up £50,000 for a deposit, your loan amount would be £450,000, and your LTV ratio would be 90%.
But if you had saved up £150,000 for a down payment, your loan amount would be £350,000, and your LTV ratio would drop to 70%. An ideal situation since you would have more lending options and typically obtain a lower interest rate.
So, that’s a brief overview of the loan-to-value ratio and how it can affect your mortgage interest rate.
Should you like to get a high LTV mortgage but are struggling to find attractive terms, be sure to get in touch with one of our expert advisors today.