What is Loan-to-Value (LTV)?
Loan-to-Value is a ratio that represents the size of your mortgage in relation to the value of the property you’re buying.
For example, if you’re buying a property worth £200,000 and you have a deposit of £40,000, you would need a mortgage of £160,000. Your LTV would be 80%
LTV is calculated by taking the mortgage amount and dividing it by the property’s value, then multiplying by 100 to get a percentage.
(£160,000(Mortgage)/£200,000(Property Value))×100= 80
Why does the loan to value ratio matter for a first-time buyer?
Loan to value ratio directly affects the types of mortgages available to you, as well as the interest rates you can expect. Generally speaking, the higher the loan to value ration the fewer the mortgages there are available.
Lenders also have LTV thresholds above which they won’t lend. So, a higher LTV might restrict your options in terms of mortgage providers.
What is the effect of loan to value on mortgage interest rates?
Loan to value ratios affect the interest rates your will be offered on your mortgage. The higher the LTV, the higher the risk for the lender, and therefore, the higher the interest rate you might be charged. Here are some hypothetical examples:
High LTV (e.g., 90%–95%): At this level, you’re borrowing a large proportion of the property’s value. Lenders see this as riskier and will often charge a higher interest rate.
For a £200,000 property, a 95% LTV would mean a mortgage of £190,000 and a deposit of just £10,000. The interest rate might be around 4–5%.
Medium LTV (e.g., 75%–89%): This is often considered a balanced range, where you might find a wider variety of mortgage products available to you, usually at more moderate interest rates
For the same £200,000 property, an 80% LTV would mean a mortgage of £160,000 and a deposit of £40,000. The interest rate might be around 2–3%.
Low LTV (e.g., 50%–74%): At this level, you’re seen as a lower risk because you’re putting down a significant deposit. You can expect the most favourable interest rates here.
With a 60% LTV on a £200,000 property, you’d be looking at a mortgage of £120,000 and a deposit of £80,000. The interest rate could be as low as 1–2%.
Can I get a 100% loan to value mortgage as a first-time buyer?
In most cases you will need some sort of deposit to get a mortgage.
However, there are a number of lenders who now offer a 100% loan to value mortgage for buyers who meet certain conditions. And a growing number of lenders who are offering 95% mortgages
Different lenders will offer different interest rates for the same LTV, so it pays to compare. Always shop around and get multiple mortgage quotes.
Mortgage brokers can help you find the best deal on the market for your particular circumstances.
What are the risks of high loan to value mortgages?
High Loan-to-Value mortgages come with their own set of risks and challenges.
Higher LTV ratios are generally considered riskier by lenders. To compensate for this increased risk, lenders may charge higher interest rates. Over the term of your mortgage, this could equate to a considerable sum of money.
Starting with a high LTV means you have less equity in your home from the outset. This leaves you more vulnerable to negative equity if property prices fall, meaning the value of your home could end up being less than the amount you owe on your mortgage.
Negative equity is a situation where the value of your property falls below the remaining mortgage balance. This can create challenges if you wish to move house or refinance, as selling the property would not generate enough funds to pay off the mortgage.
With high LTV mortgages, you may find fewer lenders are willing to approve your loan, which could limit your options when it comes to loan types, terms, and rates. You may also have fewer options for refinancing in the future if you start with a high
Given the increased risk for lenders, you may find that high LTV mortgages come with stricter approval conditions. These could include higher minimum credit score requirements, lower loan to income or debt-to-income ratios, and more extensive documentation.
Because of higher interest rates, your monthly payments are likely to be higher with a high LTV mortgage. This can place extra strain on your budget and make it more difficult to keep up with repayments, particularly if you face any financial hardships like job loss or unexpected expenses.
The push to meet the higher monthly payments of a high LTV mortgage might also mean that you have less disposable income available for other forms of saving and investment, thereby potentially impacting your long-term financial health.
While a high LTV mortgage may enable you to purchase a home with a smaller deposit, it’s crucial to be aware of the associated risks and costs. It can be a viable option, but it’s essential to weigh these factors carefully and possibly consult with a financial adviser to determine the most prudent course of action for your circumstances.
What should I do if I can’t save a big enough deposit to get a mortgage?
If you are struggling to raise a large enough deposit to get a mortgage, you could consider looking at shared equity or shared ownership options.
These schemes both offer ways to buy a property with less of a deposit than buying it outright. However, each scheme comes with its own list of pros and cons. You should research each option carefully before deciding on which option is right for you.