If you’re applying for a mortgage or second mortgage, one of the terms you’re likely to come across is loan to value, or LTV for short. It’s a standard mortgage term, but it plays a big role in how much you can borrow, what rate you’ll get, and whether your application is likely to be approved.
In this guide, we’ll break down what loan to value means, how to work it out, and why it’s so important when you’re borrowing against a property.
What does loan to value mean?
Loan to value (LTV) is a percentage that shows how much of your property's value you’re borrowing through a loan or mortgage. It helps lenders understand how much equity you have in the property. Or in simpler terms, how much of the property you already own versus how much you still owe.
For example:
- If you're buying a property worth £200,000 and you need a mortgage of £150,000, your LTV is 75%.
Whether you’re buying a new home or taking out a second charge mortgage, your LTV tells lenders how much financial risk they're taking by lending to you.
Why is loan to value important?
A higher LTV usually means more risk for the lender because you’re borrowing a greater portion of the property’s value. If house prices fall, there's less of a cushion for the lender if they need to recover their money.
Generally, the lower your LTV, the better your chances of being accepted and the more likely you’ll be offered a more favourable rate.
Many lenders even set maximum LTV limits. So, they might not lend above 85% LTV, or may only approve higher LTVs under certain conditions.
That’s why it’s always a good idea to try and get familiar with this ratio before applying for loans against your property, so you have a sense of what you may be eligible for, how much you may be able to borrow and what type of rates you may be able to get.
How do you work out your loan to value?
Calculating your LTV is fairly straightforward. Just divide the amount you want to borrow by your property’s value, then multiply by 100.
LTV (%) = (Loan amount ÷ Property value) × 100
LTV and different types of borrowing
How the loan to value works may differ depending on what type of loan you are looking to get.
- First-time buyers: In this instance, your LTV will be based on the size of your deposit. If you put down a larger deposit, it means you will have a lower LTV.
- Remortgaging: Lenders will use your current property value and the outstanding balance of your mortgage to calculate LTV.
- Secured loans (second charge mortgages): Lenders look at how much equity you have left after the first mortgage to determine how much they’re willing to lend.
Summary
Understanding loan to value is essential if you’re thinking about taking out a mortgage or secured loan. It’s more than just a number, it directly affects your loan options, how much you can borrow, and the interest rate you’ll be charged.
If you’re not sure how LTV works or want help improving your borrowing position, it’s a good idea to speak to a mortgage or loan adviser. They can help you explore your options and guide you toward the most suitable solution based on your financial goals.
Loans are secured against property. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
