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What is LTV (Loan To Value)?

whatisltv

LTV is simply a shorthand version of Loan To Value, which is a common financial term. It is typically used by lenders to express the ratio of the loan in relation to the value of the property, or asset, purchased. It is normally presented as the percentage of your property that has been mortgaged to you. For example, if you had a 10% deposit on your mortgage, then your LTV would be the remaining 90%. (The 10% of the property that you own is referred to as your Home Equity – which we discussed in greater detail here.)

More specifically, for example: if you were looking to purchase a house worth £200,000 with a £20,000 deposit, the Loan To Value would be 90% of the property. Your 10% deposit means that you have to “loan” the remaining 90%, adding up to 100%, and being covered from the borrower’s equity.

However, the higher the LTV ratio, the riskier the loan is for a potential lender. This means that you would have a greater chance of being approved for a mortgage loan with a lower LTV percentage, which would come from contributing a higher deposit on your desired property.

 

Why is a Lower LTV More Beneficial?

Typically, a LTV ratio of 80% or lower is the most beneficial for those looking to purchase a property, or even refinance their mortgage. The lower your LTV is, the less risk for the lender. Less risk means that a lender is far more likely to approve your mortgage loan, as they are only at a small risk of default on the part of the buyer.

Additionally, for the home or property buyer, a lower Loan To Value ratio often means lower interest rates, which is more beneficial. LTV is particularly important for first-time buyers, as you may not have a very large amount of money to contribute to your deposit. This means that your LTV will be high, and your interest rate will be greater.

 

What Happens if Your Home Decreases in Value?

Another significant reason to make sure you have the lowest LTV ratio as you can is the fact that your home can decrease in value, meaning your Loan To Value percentage will increase.

For example, if you acquired a property worth £200,000 with a 75% LTV mortgage on it of £150,000. If the housing price drastically plummeted to £150,000, that would mean the LTV rate would increase to 100% of the property. Then, if you went to remortgage, it would be highly difficult to get an application approved with your LTV ratio at 100%.

However, obviously, if you keep up mortgage repayments then the ratio of LTV would decrease, in the same way that your Home Equity increases. You will reduce your mortgage balance with every payment you make.

 

Make Your Initial LTV Less With Us

The most important part of understanding LTV is making sure your ratio is as low as possible, right from when you take out a mortgage loan. This can only be accessed through putting down a larger deposit when you go to purchase your property. However, if you feel that this is currently out of your reach, this is where Homes With Options can help you!

Allow us to explain how our Rent to Buy scheme will help you achieve a lower LTV when you take out your mortgage, through this simple example:

 

Your situation now:

Your Dream Home is £200,000
Your Deposit is £10,000
This works out at a 95% Loan To Value ratio, which means it may be too risky and the mortgage lender won’t approve your mortgage.

 

Your situation with our Rent to Buy scheme:

Your Dream Home is £200,000
Your Deposit is £10,000
Your Option Term is 5 years (which means you can pay Part-Rent, Part-Buy for 5 years)
Your Monthly Payments are £700per month (with £250 of this contributing to your deposit each month)
This works out that you build up £15,000 over your 5-year term, which will be added to your initial £10,000 deposit, adding up to £25,000 towards your mortgage on your Dream Home!

After the 5 year Rent to Buy period, you would apply for a mortgage with a new lower LTV ratio of only 87.5%! This means that your LTV would be far less risk, and a mortgage lender would be far more likely to approve your mortgage.

 

Rent to Buy with Homes With Options Today

If you think that’s a situation you would like to be in, then contact us today!

Find out more about our Rent to Buy scheme here, as well as our Rent to Buy FAQs here, and get in touch with us today for more information!

 

Any figures are intended for illustration purposes only, Homes With Options do not give financial or mortgage advice.  You would need to get independent advice from a financial professional regulated by the Financial Conduct Authority to be confident that you will be eligible for a mortgage when any lease period comes to the end.
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