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Mortgage Loan to Value Bands
You may have heard of the term loan to value in mortgages or heard lenders quote loan to value figures in mortgage deals. It can be an important factor has it can have an effect on the cost of your mortgage and how much you can borrow. A lower loan to value ratio is optimal. It can be referred to ‘LTV’ in its short form.
In this article we discuss more in depth loan to value and why it’s important.
How loan to value is calculated
Loan to value is calculated by using the figures of the purchase price of a property, your deposit amount and how much loan you require to borrow as your mortgage.
You can calculate this yourself by taking the price of the property and subtracting the deposit amount you have. This will leave you with the amount you will require as a mortgage loan. Then you take the mortgage loan amount and divide it by the price of the property and multiply this figure by 100 to get the loan to value percentage.
Price of property = £200,000
Deposit amount = £20,000
Price of property (£200,000) – Deposit amount (£20,000) = Mortgage loan amount (£180,000)
Mortgage loan amount (£180,000) ÷ Price of property (£200,000) = 0.9
0.9 x 100 = loan to value of 90%
What is loan to value?
Loan to value is a term used in all types of mortgages, whether you are buying your first property or remortgaging. Loan to value is expressed as a percentage and it’s a ratio of the price of the property you intend to purchase or remortgage and how much a lender is going to loan to you as a mortgage. Loan to value can have an effect on how much you can borrow and the interest rate you can have access to. Generally, a lower loan to value is more advantageous to lenders as it means the borrower is borrowing less on their mortgage and lowers the risks for a lender.
Once you know your loan to value, you are able to find out the mortgage deals you qualify for.
First time buyers may find themselves stepping onto the property ladder with a high loan to value as it is likely they will have a small deposit to put down. Fortunately, there are lenders who provide mortgages tailored for first time buyers.
Buy to let mortgages can be seen as higher risks to lenders so they generally carry a lower loan to value percentage when compared to a standard residential mortgage. Typically, lenders will require you to have a loan to value of 75% or less.
How to lower your loan to value
Higher loan to value is deemed as higher risk as the monthly payments will be higher which can increase chances of default. For lenders, if a borrower defaults, they would have to sell the property in order to get their loan back and if property prices has decreased, this can lead to the property having negative equity and the lender may not be able to recoup all their money back from the sale. Valuations are carried out to ensure the standard of the property and underwriters will assess the property before agreeing to the loan.
A lower loan to value percentage is more desirable so the lower it is, the better it is for you in terms of mortgage options. Having a lower loan to value will unlock a wider range of mortgage lenders and products available to you to choose from. As the risks are lowered for a lender when a mortgage is offered on a lower loan to value, interest rates will be more competitive.
Credit score can have an impact on loan to value. Generally, if you have a good credit history, you should be able to borrow on a higher loan to value ratio as you are deemed as a less risky borrower. Those who have lower credit scores or have any adverse credit history may find that lenders are only willing to offer a mortgage at a lower loan to value therefore will need a bigger deposit.
If you are looking to seek advice for a mortgage, please get in touch with us today. Speaking with a mortgage broker can help you determine how much you can borrow and how much deposit you will need for a mortgage.