LTV is an abbreviation for loan to value which means size of the mortgage in respect of the property’s value that is being purchased. It is represented in percentage. So for instance, if the mortgage is of £300,000 and the value of property is £600,000, your LTV would be 50%.
This implies that 50% of property value is paid for out of your own deposit, your own money and the remaining 50% by your mortgage.
Calculation of LTV
Perhaps, the best way is to utilize an LTV calculator. However, it can be calculated by division of mortgage amount and property’s value. The resultant answer must be multiplied by 100. Here is an example.
For instance, a property worth £300,000 is purchased and the mortgage amount is £240,000:
240,000/300,000=0.8
0.8*100=80%
So the LTV stands at 80% while the deposit is 20% or 60,000.
What difference does it make?
Generally, LTV and the risk for the lender to offer you mortgage is directly proportional. The chances of getting default on mortgage are higher if you have less equity in the house. Lender will face more loss if the house is sold in such course of events. This is because the property’s value can fall below the original purchase price. So if a large mortgage has been taken out, its value can actually result in being more than the property’s value.
Consequently, having high LTV means getting access to less competitive mortgages. Lower LTV means more deposit which further means having better mortgage rates. Those with an LTV of an approximate of 60% has better mortgage rates.
How to avoid higher LTV?
The best advice for purchaser is to save as much as possible towards the deposit. This means it is imperative to wait for a longer period before making the first house purchase. Higher the money that is put down as deposit, lower the LTV falls and better the mortgage rate becomes.
However this is not the only way. It is recommended to look forward to properties that have a lower asking price. This can have a direct impact on mortgage reducing its size.
How is LTV influenced?
There are two basic ways in which this can be done:
- It is better to have less of a mortgage. Having a repayment mortgage means that LTV can be reduced during the payment process. However, in interest-only mortgages, the balance remains same while only interest is impacted.
- This is one of the most effective ways in which LTV can be influenced in a positive manner. Keep your house in the best order possible. This way the losses are minimized if the property values go down. House value can be improved by working on improvement projects such as replacing windows, upgrading bathrooms and kitchen and enhancing the aesthetic appeal. It increases property’s value and gives bigger equity during the process. This reduces the LTV when the time for remortgage comes. Look for different ways to increase property’s value.
