When it comes to finances and mortgages, language can be filled with jargon and acronyms. If you’re looking for a mortgage product, whether you’re a first-time buyer or stepping up the property ladder, you’ve probably come across LTV when searching. While it’s easy to overlook, it’s an important part of getting a competitive deal.
What is LTV?
LTV stands for loan-to-value. It refers to how much you’re borrowing through a mortgage in relation to what the property is worth. The lower the LTV, the more equity you hold in your home.
Let’s say you have a £250,000 home and you have £200,000 left on your mortgage, your LTV would be 80%. This means your equity within the home is 20%, with the remainder being covered by the mortgage. In contrast, if you had just £100,000 remaining on a mortgage for the same home, your LTV would be 40%.
Understanding your LTV can be useful when calculating the value of the assets you hold. If you plan to release some of the equity in your home, it’s important you consider the value and what remains on the mortgage. However, your LTV ratio also affects mortgage options and could save you money.
Why does LTV affect your mortgage options?
Your LTV affects what interest rate you’ll be offered by a mortgage lender.
The more equity you hold, the more competitive the interest rates you’ll be offered. This is because you’re viewed as less of a risk, as it’ll be easier for lenders to recoup their losses should you default on payments. There’s also less of a risk that you’ll be affected by negative equity, where you owe more than the property is worth, should house prices fall.
As a result, first-time buyers, who may have an LTV of 95-90%, usually pay a higher interest rate than someone who is remortgaging their home after owning it for many years.
LTV bands are usually set at 5% or 10% increments. So, if your LTV is 62%, for example, and you have the capital to make an additional payment to bring your LTV under the 60% mark, you could save money in the long run by accessing a lower interest rate.
Interest rates can have a significant impact on your monthly outgoings and the amount you pay overall. Interest rates are low at the moment, so the difference may not have been as significant as it has been in the past, but it still adds up.
Let’s say you have £100,000 remaining on your mortgage as a first-time buyer after using a deposit of 10% making your LTV 90%. You may be offered an interest rate of around 3.2%. Over a 30-year mortgage period this would mean:
- Monthly repayments of £432
- The total costs repaying the £100,000 coming to £155,688
On the other hand, if you have £100,000 remaining on a mortgage for a property worth £600,000, putting your LTV at 60%, you can expect a lower interest rate of say 1.4%. Over the same 30-year period this would mean:
- Monthly repayments of £340
- The total cost of repaying the £100,000 coming to £122,524
Of course, the scenarios aren’t directly comparable. If you have an LTV of 60% you may be looking to reduce your mortgage debt quicker by reducing the mortgage period. However, the figures do highlight how interest rates have an impact on your monthly expenses and the amount you’ll pay back in total. As a result, your LTV is something you should consider when searching for a mortgage product.
Rising property prices: Reducing your LTV
With a lower LTV leading to a more competitive interest rate, how do you move into a lower band?
The most obvious way is to meet repayments and overpay where possible. Over time, the equity you hold in your home will increase and the LTV ratio will fall. But property prices play a role too.
If property prices rise, the ratio between the value and remaining mortgage changes. As a result, rising property prices can help you secure a lower LTV and lower interest rates in the future. On the other hand, falling property prices can mean the LTV ratio increases. If you’re looking to remortgage a property, it’s worth keeping this in mind. Whether you’ve invested in your home or property prices have increased in your area, getting your home valued could save you money.
LTV is an important factor in securing a competitive mortgage deal. However, there are hundreds of mortgage providers available, including those without a presence on the high street, and interest rates vary enormously. It’s still important to search the market to find a product that matches your needs and is competitive. Please contact us if you’d like support when searching for your next mortgage product.