How much of the total cost of your property is covered by your mortgage is known as the 'loan-to-value' ratio.
For investors, this number is crucial because it can significantly affect your ability to borrow money and the total cost of your mortgage. In general, a low loan-to-value ratio is preferable by banks that one that is high
Here’s our guide to understanding loan-to-value ratio, and what it means for you in practice.
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What Is The LTV Ratio? (Loan To Value)
Lenders and brokers frequently use the term "loan to value" (LTV) when referring to the process of purchasing a mortgage.
This is the loan's size in relation to the total value of the property, and it is frequently expressed as a percentage (for example, "a 60% mortgage").
One of the most crucial elements in the mortgage application process is the LTV ratio. Even if you don't make on-time repayments, lenders want assurance that they will not lose money by lending to you.
Lenders always have the option of repossessing and selling your home to recoup the loan's value if you are unable to pay off your mortgage.
This implies that if your LTV ratio is high, lenders will demand stricter terms, which may result in higher interest rates and fees as well.
On the other hand, they much prefer to lend to those with low LTVs (for example, a 50% mortgage), as this increases their likelihood of losing money. As a result, they will provide these low LTV customers with the most alluring mortgage deals.
In other words, having a lower LTV will result in lower interest payments overall and lower overall property payments.
Calculating Your Loan To Value Ratio
The size of your deposit, or the cash lump sum you have saved up to use in addition to the mortgage, will be a crucial factor if you're getting ready to purchase your first investment property.
You can determine your LTV ratio once you are aware of this. The amount of the mortgage loan you will require is calculated by deducting your deposit from the property's total value.
Your mortgage's LTV ratio is calculated as a portion of the total value of your property.
For instance, if you are purchasing a £300,000 property and have saved up £75,000, your deposit will be 25% of the total value. Your LTV ratio would be 75% because your mortgage would have to pay the remaining 75%.
What Is A Good Loan To Value Ratio In The UK?
A buy-to-let mortgage typically requires a minimum deposit of 25% of the property's value, though this can range from 20% to 40%.
The majority of BTL mortgages only charge interest. As a result, you do not pay the capital amount but rather the interest each month.
You fully repay the original loan at the end of the mortgage term. Additionally, BTL mortgages also have a repayment option and some lenders allow up to 10% repayment every year without any penalities if you wish to reduce the mortgage over time.
Which Lenders Require The Lowest Deposit?
The BTL lenders that will accept the smallest deposits when purchasing a property currently are MFS, Foundation, and Vida Home Loans to name a few. Among your top choices for apartments are Kensington Mortgages and OSB Group which leverage quite high.
Keep in mind that you can't afford to be turned down when you only have a small number of lenders to select from. You should carefully select the lender who is best suited to your situation and work with a broker to prepare your mortgage application for the best chance of approval.
What Happens To My LTV If The Value Of My Mortgage Drops
The value of your property is likely to change over time as the economy expands and contracts. If the value of your property falls sharply, your loan-to-value ratio (LTV) is likely to increase. And if it falls particularly sharply or quickly, you could end up in what is called negative equity: that is, owing more on your mortgage than your property is worth.
For example, if you buy a £300,000 property at a 60 percent LTV ratio, you owe the lender £180,000. But if six months after buying the property its value falls to £150,000 (e.g. as a result of market conditions). This may create problems if you need to sell the property or remortgage.
How Can I Lower My Loan To Value Ratio?
In order to obtain lower mortgage interest rates, it is important to decrease your loan-to-value (LTV) ratio.
Therefore, it is beneficial to strive for the lowest possible LTV. Several factors can contribute to reducing your LTV ratio.
Yearly Overpayments Or A Capital Repayment Mortgage
If you have a mortgage that requires repayment, your loan-to-value (LTV) ratio will decrease as you steadily repay the borrowed amount.
You can expedite this reduction by making additional payments towards your mortgage.
This will allow you to benefit from lower interest rates when you choose to remortgage. It's important to note that all payments should be made on time and in full to avoid any potential negative impact on your credit score.
Rising House Prices
When the value of your property increases, the percentage covered by your mortgage decreases, which consequently lowers your loan-to-value ratio (LTV).
Typically, property prices tend to rise gradually over time. However, making certain repairs, renovations, or doing some DIY work could potentially increase the value of your property even further. In such cases, obtaining an independent valuation can help you determine whether your LTV has improved.
Having A Bigger Deposit
The best means of reducing your LTV is to accumulate a larger down payment prior to purchasing a property.
If your savings continue to increase at a quicker rate than property prices, each monthly savings will ultimately result in a less expensive mortgage. It is the most dependable method of achieving a lower LTV.
What Type Of Deposit Will The Lender Accept?
What type of deposit will lenders accept?
There are various ways to raise capital, and you’ll need to provide proof of the source.
Your buy-to-let mortgage deposit can come from:
Personal savings
Inheritance
Selling another property
Mortgaging another property
Gifted deposit
Loan from family
Concessionary purchase
Redundancy pay
Builders deposit
Unsecured loan
Disclaimer
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties.
Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract. Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.
