Property > Mortgages
What Is Loan-to-Value (LTV) Ratio?
The Loan-to-Value (LTV) ratio is a percentage given to outline the size of your loan in relation to the value of the asset, e.g. a property or car. For the purpose of this article, we will use the example of purchasing a property.
How to Calculate LTV Ratio
LTV can be calculated using the equation below:
(Amount Owed ÷ Value of Property) x 100 = LTV
For example, if you’re buying a house for £100,000, with a deposit of £20,000 and a loan of £80,000. The LTV ratio at the time of purchase is 80%.
(£80,000 / £100,000) x 100 = 80% LTV
Mortgage lenders use LTV as an indication of the level of risk. A high LTV ratio is seen as a higher risk – you are borrowing a larger percentage of the property value; therefore, the lender’s potential loss is greater if repayments can’t be made.
LTV Ratio Changes Over Time
While lenders are most concerned with the LTV ratio at the time of issuing the mortgage, after the purchase has been made, your LTV will vary over time due to changes in the property value and size of your mortgage. This is particularly important to understand if you’re looking to remortgage.
Let’s run through some scenarios and see how they affect your LTV ratio:
Scenario 1:
At purchase, your property value is £100,000 with an £80,000 mortgage
Property Value = £100,000
Mortgage = £80,000
(£80,000 / £100,000) x 100 = 80%
Scenario 2:
You have repaid some of your mortgage capital therefore, your debt has reduced to £75,000
Property Value = £100,000
Mortgage = £75,000
(£75,000 / £100,000) x 100 = 75%
Scenario 3:
Your property value has increased by £25,000
Property Value = £125,000
Mortgage = £75,000
(£75,000 / £125,000) x 100 = 60%
Scenario 4:
Your property value has decreased in a market downswing
Property Value = £70,000
Mortgage = £75,000
(£75,000 / £70,000) x 100 = 107%
An LTV of over 100% is known as ‘negative equity’. This is when the value of the property is less than the outstanding balance on the loan.
Bottom Line:
The lower your LTV ratio, the less risk you pose to lenders, and therefore you may get access to better deals.
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