When applying for a mortgage, one of the key metrics that lenders will look at is the Loan to Value (LTV) ratio. Understanding how to calculate LTV is essential, as it can impact your mortgage approval, interest rates, and the amount you can borrow. In this guide, we’ll explain the simple formula for calculating LTV, why it matters, and how it affects your mortgage options.

Why does LTV matter when applying for a mortgage?

The Loan to Value (LTV) ratio is one of the most important factors that lenders use to assess your mortgage application. It is used to determine how much risk is involved in lending to you. The higher the LTV, the more risk there is for the lender. This is because you are borrowing a larger proportion of the property’s value.

  • Low LTV: A lower LTV (e.g., 60% or 70%) means you have more equity in the property, which lowers the risk for the lender. As a result, you may be offered lower interest rates and better mortgage terms.
  • High LTV: A higher LTV (e.g., 90% or 95%) means you’re borrowing a higher percentage of the property’s value, which increases the lender’s risk. Consequently, lenders might charge higher interest rates, and some may impose stricter eligibility criteria.

Knowing how to calculate your LTV helps you understand how lenders view your application and can influence your mortgage deal.

LTV example: step-by-step calculation

Calculating your Loan to Value (LTV) ratio is simple. Here’s the formula:

LTV = (Loan Amount ÷ Property Value) × 100

Let’s say you want to buy a house worth £250,000, and you plan to take out a mortgage for £200,000.

LTV = (£200,000 ÷ £250,000) × 100 = 80%

This means your LTV is 80%. This tells the lender that you are borrowing 80% of the property’s value, and the remaining 20% is covered by your deposit. The lower your LTV, the better your chances of securing a favourable mortgage rate.

How LTV affects your mortgage interest rate

Your Loan to Value ratio plays a significant role in determining your mortgage interest rate. Lenders assess the LTV ratio to understand how much risk they’re taking on. Generally, the lower the LTV, the more likely you are to secure a competitive interest rate.

  • Low LTV (60% or below): These borrowers are seen as less risky, and they typically receive the best interest rates. The lender is more confident that the property has enough equity to cover the loan in case of default.
  • Medium LTV (60%-80%): This range still offers fairly competitive rates, but the rates may not be as low as for those with a lower LTV.
  • High LTV (80% and above): These loans are higher risk for lenders, so they may offer higher interest rates or impose additional conditions to offset the risk. In some cases, you might also need to take out mortgage insurance.

What are the typical LTV bands used by lenders?

Lenders typically use LTV bands to define mortgage products. These bands help determine the type of loan and the interest rate you may be offered. Here’s how LTV bands generally break down:

  • Below 60% LTV: Often the best interest rates and terms are offered. A low LTV shows the lender that you have a significant amount of equity in the property.
  • 60%-75% LTV: Still considered low risk. You’ll likely receive competitive rates.
  • 75%-90% LTV: Common for many homebuyers, though you may see higher interest rates than those with lower LTVs.
  • Above 90% LTV: These mortgages come with higher rates due to the higher risk for lenders. Lenders may require additional fees or insurance.

If you are in the high LTV band, lenders may also require you to pay for mortgage insurance, especially if you’re borrowing more than 85% of the property value.

Can you get a mortgage with a high LTV?

Yes, it is possible to get a mortgage with a high LTV ratio, but it comes with a few challenges. Lenders may offer higher interest rates or impose additional conditions to protect themselves from the increased risk.

  • High LTV Mortgages: If you’re borrowing more than 80% of the property’s value, you’re considered a higher-risk borrower. This could mean a higher interest rate and fewer mortgage products available to you.
  • Shared Ownership Schemes: Some government schemes, such as the Shared Ownership scheme, can help first-time buyers. These schemes can make it easier to get a mortgage with a smaller deposit, but you will need to meet certain criteria to qualify.
  • Mortgage Insurance: With higher LTVs, you may be required to pay for mortgage insurance. This insurance protects the lender if you fail to repay the loan, but it also increases your monthly payments.

While it’s possible to get a mortgage with a high LTV, it’s important to be aware of the implications it may have on your mortgage terms and interest rates.

Final thoughts: understanding and optimising your LTV

Understanding your Loan to Value ratio is essential when applying for a mortgage. It affects your mortgage eligibility, the interest rates you’ll be offered, and your ability to borrow. If you want to improve your chances of getting the best possible deal, it’s advisable to aim for a low LTV by saving a larger deposit or considering other options to reduce your borrowing.

If you’re unsure about your LTV or how it affects your mortgage application, find a mortgage broker to speak with. They can help guide you through the process and find the best mortgage deals based on your financial situation.