There can be an awful lot of jargon to wade through when it comes to mortgages, but few terms are quite as important as the LTV.
LTV stands for loan-to-value and it's one of the most important things to get to grips with if you're looking at taking out a mortgage or remortgaging for a new deal. But what exactly is it, and why does it matter?
What is the LTV?
Loan-to-value basically refers to how the size of your mortgage compares to the overall value of your property. Essentially it describes what proportion of the value of your house your mortgage covers.
Let’s say you are looking to take out a mortgage of £150,000 on a property worth £200,000. In that instance, the LTV of the mortgage you want is 75%. The loan is the equivalent of 75% of the value of the property, and your deposit covers the other 25%. In theory, as you pay off your mortgage your LTV will steadily go down as your monthly payments reduce the size of your loan and house prices increase.
Why your LTV makes a difference
The LTV is important for a number of reasons.
For starters, mortgage lenders price up their rates according to different LTV bands. Depending on your LTV level, lenders tend to have different rates available. So there may be one rate for anyone with around a 60% LTV, one for 70% LTV, 80% LTV and so on.
Generally, the smaller the LTV, the better the rate you’ll be able to get, whether you’re looking for a mortgage to cover a purchase or a remortgage. From a mortgage lender’s perspective, if you are putting in a larger deposit or have a bigger chunk of equity built up in the property, then you are less risky than a borrower with only a small deposit. As a result, you enjoy a smaller rate of interest, which means lower monthly repayments.
There is also a question of choice. If you are looking to remortgage at 60% LTV, then you will have plenty of different lenders to choose from - lenders are generally keen to take on borrowers who they believe to present low risk.
However, as the LTV of the mortgage you are looking for gets bigger, your options may gradually become more limited.
While you should be able to get a mortgage or remortgage if you are looking for a 90% LTV deal or even a 95% LTV loan, you won’t have as many lenders to choose from. The days of the 100% LTV mortgage are long gone.
In this example, your mortgage would be 90% loan-to-value.
How to work out your LTV
If you already have a mortgage, you can easily estimate your current LTV too. Simply compare your outstanding mortgage balance with the current value of your home. It’s fairly easy to work out the value of a property when it’s your first mortgage, as it is whatever you are willing to pay in order to buy it. But it's a little trickier when you already own the house. A good start is to look at property portals like Rightmove and Zoopla to see how much similar homes in your area have sold for recently. You could also invite an estate agent round to give you an idea of the property’s value. Most agents won’t charge a fee for this, as they hope that you will use them should you opt to sell the property.
When the time comes to actually apply for a remortgage product, the lender will send out an independent valuer who will inspect the property and work out what it is likely to be worth.
What happens if the value of your house drops?
If the value of your house drops, you could end up in what's known as negative equity. This could leave you in a situation where you have a LTV over over 100%.
Negative equity is potentially a problem if you’re looking to remortgage. As the name suggests, this is where the size of your outstanding mortgage is greater than the value of your property. It can happen if your property drops in value after you buy it.
So using our example above, it may be that when you bought the property it was worth £200,000. But if it is now worth £120,000 and you still owe £140,000 on the mortgage, then you are in negative equity.
It’s important to remember that being in negative equity doesn’t mean you’re at risk of losing your home. So long as you keep up with your monthly repayments, everything will be fine on that front. However, while it’s difficult to remortgage if you only have a small amount of equity, it’s nigh on impossible if you are in negative equity.
You have two options here. The first is to focus on lowering the size of your outstanding mortgage so that is once again below the overall value of your property. You might want to overpay on your mortgage to speed this along - most mortgages allow you to pay up to 10% above your usual repayments without hitting you with any additional charges.
The other option is to look at ways to increase the value of your property. This may mean considering home improvements, such as adding an extension or a loft conversion, which may bump up the value of the property above your outstanding mortgage again. There is no guarantee that carrying out these works will actually result in a significant increase in the value of your home though.
Realistically, neither of these are quick fixes; it may take a little time for you to get out of negative equity.