What is loan-to-value ratio (LTV)?

Key takeaways

• Loan-to-value ratio shows how much you're borrowing relative to the property price

• Lower LTVs typically mean you qualify for better mortgage rates, but they require a higher deposit

• Mortgage rates usually come down incrementally in 'steps', for example, from 90% LTV to 85%, so increasing your deposit slightly could give you access to better rates access better rates

What is a loan to value ratio?

Loan-to-value ratio (LTV) is a way of measuring how much money you’re borrowing, compared to the total value of your property. Your LTV will be expressed as a simple percentage. So, for example, if you’re buying a home worth £100,000 with a deposit of £10,000 – and then borrowing the other £90,000 – your loan to value ratio will be 90%.

If you’re buying the same property with a deposit of £5,000 – and so borrowing £95,000 – your LTV will be 95%.

You’re most likely to encounter LTVs when you’re applying for a mortgage. Your LTV is a major factor in determining what kind of mortgage you can get.

In general, lenders reserve their best deals for people with lower LTVs as they are borrowing smaller amounts when compared to those with a high LTV. Lenders will view these borrowers as lower risk.

There’s no minimum LTV, though a lower number is always better. That said, even if you can’t put together a big deposit, help is still available. There are also several 95% LTV mortgage deals available, which means that you only need a deposit of 5%.

Just be warned there are risks associated with taking a ‘5% mortgage’. This includes the chance you end up in negative equity. (This is the value of your home drops below the amount you owe on your mortgage).

Why is my loan-to-value ratio important?

Your loan-to-value ratio is a very important factor when it comes to buying property because:

• Loans with a higher LTV are a bigger risk for the lender. If you have a higher LTV and can’t make your repayments, the lender will make back less money should they end up needing to resell your house.

• Lower loan-to-value ratios also protect lenders from changes in house prices. If you have a 95% LTV mortgage and property prices fall by 5%, your bank will no longer be able to make back all its money if it needs to seize your home. But if your LTV is 60%, even if prices fall, your lender still won’t have to worry about losing its investment.

How do I calculate my loan-to-value ratio?

It’s simple to calculate your loan-to-value ratio. All you need to do is divide the amount you need to borrow by the total value of the property, then multiply the result by 100 to get a percentage.

Here’s some examples to help you.

Let’s say, for example, that you’ve saved up £30,000 for a deposit and you want to buy a home worth £250,000. That means you’ll need to borrow the remaining £220,000. So, 220,000 divided by 250,000 equals 0.88, meaning that your LTV is 88%.

With such a high LTV, it might be difficult to take advantage of the very best deals and you may end up with a more expensive interest rate.

But if you were to find another property worth £140,000. With the same £30,000 deposit, you’d only need to borrow £110,000. Repeating the calculation, 110,000 divided by 140,000 is just under 0.786. So, your LTV is a much healthier 78.6%. At this rate you are more likely to get a mortgage with a lower interest rate, saving you money overall.

Use our LTV Calculator

What is a loan-to-value band?

Usually, lenders divide their mortgage deals into different LTV bands. These generally rise in increments of 5%, and with every band, you’ll be able to qualify for a new rate.

With this in mind, it makes sense to put down a bigger deposit – or to find a slightly cheaper, more affordable property – as this will then move you into a ‘lower LTV band.’ Not only will this provide you with a more favourable rate overall, but it could also help you save a considerable amount of money in the long term.

What is a 'good' loan-to-value ratio?

Ideally, your ideal loan-to-value ratio should be somewhere below 80% because anything above this is considered a high LTV. However, this might not always be possible and there are plenty of mortgages available for people with LTVs at 80%, 90%, or even 95%.

Just be aware if you have a higher LTV you’ll be paying much more in interest and you’ll own less of the property. Be mindful of the fact it works the other way too. An LTV of 60% is better than 70% - and 50% is better than 60%. Equally, if your LTV is even smaller than this, you could get access to even lower interest rates. Of course, getting a mortgage with a higher LTV will allow you to get on the property ladder quicker. If house prices go up faster than the value of your savings, then the longer you wait, the more your LTV could end up rising.

So, there are times when it might be worth getting a mortgage with a high loan-to-value ratio. If you do end up doing this, it’s then worth seeing if you can bring it down once you’re in your new home.

How can I lower my LTV ratio?

Reducing your LTV means you should be able to access lower interest rates on your mortgage. With this in mind, it’s useful to get that number as low as possible. There are a number of things you can do to reduce your loan-to-value ratio:

How to lower LTV ratio

Opt for a repayment mortgage

With a ‘repayment mortgage, your LTV will gradually go down over time as you slowly pay back the money you’ve borrowed. However, you can speed up this process by making overpayments on your mortgage. Then, when it’s time to remortgage, you can take advantage of lower rates.

Take advantage of Rising house prices

If the value of your property goes up, the portion covered by your mortgage goes down, lowering your LTV. In general, house prices tend to increase over time.

But investing in some repairs, renovations, or even a few DIY projects could potentially push it your home’s value up higher. You could then get an independent valuation to see if your LTV has improved.

Save a bigger deposit

The most reliable way to get a lower LTV is by saving up for a bigger deposit before you buy a property. This can make your mortgage cheaper in the long run. But you need to balance this against rising house prices, which could outpace your savings if you wait too long.

Can I take out a 100% LTV mortgage?

Yes, it is possible to take out a mortgage with no deposit. But what you need to know is that very few lenders offer these deals. If you do decide to proceed with a 100% LTV mortgage, you will almost certainly need a guarantor. A guarantor is someone who will have to cover your monthly mortgage instalments if you’re not able to do so yourself. Generally, it will be a parent, grandparent, or very close relative or friend. This type of mortgage can be useful if you’re eager to get on the property ladder, especially if you don’t have enough funds for a deposit.

But bear in mind that it can also be a risky option, as your guarantor may end up paying a substantial amount of money if you can’t repay your debt. In the worst-case scenario, their house may also be repossessed if the debt is unable to be repaid. All parties need to go into this arrangement with eyes wide open.

How does my loan-to-value ratio work with a remortgage?

As you repay your mortgage, your share of the property grows, which reduces your LTV ratio over time. When you remortgage, your LTV is likely to be lower than when you first bought the home.

If house prices have gone up, your LTV will fall further because your outstanding loan represents a smaller proportion of your property’s increased value. But conversely, if house prices fall, your LTV could rise – and could potentially exceed your original ratio. If this happens, this could mean your remortgage options are limited.

If you’re looking to remortgage, it might be worth making a few lump-sum overpayments to nudge your LTV down into a lower band. That way, you can get a better deal. For example, you could find that reducing the ratio from 80% to 75% could make a significant difference in terms of the rate you end up with.

Another option is to get a remortgage for a higher amount. This way, your LTV stays the same, but you can get some extra cash – perhaps for a home renovation or another big expense. But bear in mind that doing this will mean you pay more for your mortgage every month. Not only that, but you’ll also stay in debt for longer.

Other useful guides

If you found this guide helpful, here are some more you might like to read:

• Do I need a mortgage broker?

• What mortgage can I afford?

• How to remortgage

Compare mortgages with MoneySuperMarket

We hope you have found our loan-to-value (LTV) guide useful. Whatever your deposit, it’s easy to find a great deal with MoneySuperMarket. We compare prices from over 90 different lenders across the market, so you can be confident you’re getting the right deal for you. Even if you have a high LTV, there are plenty of products out there that can help you make your dream home a reality for less. Try it now and see how much you could save.

Your home may be repossessed if you do not keep up repayments on your mortgage.