High Loan to Value Mortgages

What Is Loan-To-Value (LTV) Ratio?

The term ‘loan-to-value ratio’ sounds complicated, but it’s actually quite simple. It’s just the amount you’re borrowing compared to the overall value of the property you’re buying, expressed as a percentage. 

LTV is one of the main things that mortgage lenders like banks and building societies look at when deciding whether to grant mortgages. It can also play a part in the interest rate you’re offered if you’re approved for a mortgage. 

Why is LTV Ratio Important?

The reason LTV is important is it indicates to mortgage lenders how much of a risk you are as a customer. The higher your ratio, the more you’re borrowing in relation to the property’s value. 

This potentially increases the lender’s loss if you can’t make your repayments and default on the mortgage. There’s also the risk that the property’s value falls, which means that if it needs to be sold as part of a repossession, the sale may not cover the outstanding balance on the mortgage. This would result in something known as ‘negative equity’ – a situation that mortgage lenders understandably want to avoid. 

From your point of view as an applicant, LTV is important because it affects the kinds of mortgage deals you can access. 

As lenders much prefer applicants with a lower LTV ratio, they offer the best deals to low LTV (i.e. 70%) customers. For everyone else, there may be higher interest rates, higher fees and tougher terms and conditions. This may mean higher monthly repayments and a longer payment term – so you’ll be paying your mortgage off for longer. 

Is A High LTV Mortgage Right For Me? 

While high LTV mortgages often come with higher rates and fees than other mortgage deals, this doesn’t necessarily mean you can’t or shouldn’t apply for one. 

It may be the best solution for someone in your circumstances – for example, a first time buyer with a low deposit, who is paying too much to rent a property and wants to get on the property ladder. If you can afford the monthly repayments and any extra costs, it could be the ideal solution. 

You can also see it as the first step towards lowering your LTV over time. You can start off with a high loan-to-value mortgage and buy your first home, thereby saving money on rent while also building up equity in your home as house prices increase. 

Then every time you remortgage, you can gradually improve your LTV through increased equity and your savings. You should also bear in mind that your income may increase in the future, which can also help you lower your LTV. 

But if you’re worried about high rates and fees, and want a better mortgage deal, you may want to wait until you’ve saved up a larger deposit. This could unlock better mortgage rates, which could save you money in the long run. 

For expert advice on all your options, get in touch with Ascot Mortgages for a free initial consultation. 

How to Calculate Your Loan-To-Value Ratio

Your loan-to-value ratio is calculated as a percentage. To work it out, you need a few important figures to hand:

• The total deposit you have
• The value/price of the property you want to buy 
• The mortgage amount – this is the amount you’re borrowing, and it can be calculated by minusing your deposit from the property price. 

To find your LTV, simply divide the mortgage amount by the property value/price. Multiply by 100 and you’ll have a percentage. 

The calculation to remember is LTV = Amount Borrowed (Mortgage) / Property Value.

Here’s a quick example:

Let’s say that the property you wish to buy is £400,000 and you have a deposit of £40,000 (10%). You’ll be borrowing the remainder – £360,000 – from your mortgage provider in order to buy the property. 

To find your LTV, divide the Amount Borrowed (Mortgage) of £360,000 by the Property Value of £400,000. Multiply by 100 and you’ll have an LTV of 90%.

What Is A ‘Good’ LTV Ratio?

The lower your LTV, the better the mortgage rates you’ll be able to access. To get the very best deals, you’ll want an LTV ratio of 60% or less. 

A good middle ground is around 70%, which should mean you can access many of the more competitive mortgage deals across the market. 

Anything higher than 85% is viewed less favourably by mortgage lenders, although of course it is still possible to get a mortgage. In fact, high loan-to-value mortgages are commonly used by first-time buyers, as lenders understand that this type of customer won’t have had a chance to build up equity or a large deposit yet. 

How To Improve Your Loan-To-Value Ratio

If you’re looking to get a better mortgage deal, you’ll need to improve your LTV. This will either mean saving for a bigger deposit, although this may also mean that property prices increase during this time. 

You may also be able to negotiate a lower price when buying a property. If you make a low offer and it’s accepted, this brings your LTV down as it means the property price is also lower. 

If you already own a home, you can find ways to increase its value – perhaps through building an extension or renovating the house. And you should also ensure you make your monthly repayments on time every month. With every payment, you own more of your home and your equity grows. This has the effect of gradually lowering your LTV. 

High Loan-To-Value Mortgages For First Time Buyers

High loan-to-value (LTV) mortgages are ideal for first-time buyers, who may not be able to get a large deposit together but are keen to get on the property ladder. If you have a limited deposit of 10% or less of the property you would like to purchase, this type of mortgage could be right for you. 

A high loan-to-value mortgage means you are able to borrow a high proportion of the value of the property. 

There are a number of high LTV mortgages around, including 95% and even 100% LTV mortgages – although these can be complex to get. 

High LTV mortgages do come with stricter lending criteria, which can vary between lenders. 

Before taking out this kind of mortgage, a word of caution. Not all high loan-to-value mortgages offer a good deal, and some can have high lending charges, high interest rate and /or expensive extended tie-ins. 

So if you are considering taking out an LTV mortgage, it’s really important to speak to a reputable mortgage broker such as Ascot Mortgages first. We’ll make sure that this kind of mortgage meets your needs, doesn’t cost you too much and is the best possible mortgage deal available.

Do LTV Mortgages Have Any Costs For First Time Buyers? 

First-time buyers with limited cash available for a deposit need to also factor in other unavoidable expenses associated with buying your first home:-

• Mortgage arrangement fee (this can often be added to the mortgage)
• Mortgage valuation fee (this can sometimes be added to the mortgage)
• The cost of commissioning an independent homebuyer or buildings survey
• Legal fees (some lenders will contribute towards the cost of your legal fees).