The loan to value ratio, or LTV, of a mortgage, is based on much money you need to borrow to afford a property.
For example, if you’d like to buy a £200,000 home, and you need to borrow £180,000 to make that possible, then the mortgage would have an LTV of 90%. (£180,000 is 90% of the value of the home.) You would provide the remaining 10% – £20,000 – in the form of a deposit (or home equity, if you’re remortgaging or moving house).
The LTV is the single most important factor when it comes to deciding what interest rate the mortgage lender will offer you. If you have a low LTV, you will get a significantly lower interest rate, which can equate to tens – even hundreds – of thousands of pounds saved over the duration of your mortgage.
By way of example, a mortgage lender may offer you a 95% LTV two-year fixed rate mortgage with an interest rate of 2.3%. If you drop the LTV to 90%, the interest rate could be closer to 1.8%.
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In short, if you have a low LTV, the mortgage lender is taking less of a risk – and they reward that lower level of risk by giving you a preferential interest rate.
For example, if you have borrowed £190,000 to buy a £200,000 property (95% LTV), and then the value of the property goes down and you can’t keep up repayments, there’s a chance that the lender won’t get all of their money back. The mortgage lender hedges this higher level of risk by making you pay more interest.
If you only need a mortgage of £150,000 to buy that same £200,000 property (75% LTV), there’s a lot more wiggle room: the bank might be able to sell your home and make back most or all of its money.
Whenever your LTV goes down by 5%, you will usually unlock a better mortgage product with a lower interest rate or other desirable features. Most mortgage providers won’t offer you a mortgage above 95% LTV (5% deposit), and then it steps down in 5% increments to 60%: 90% LTV, 85%, 80%, 75%, 70%, 65%, and 60%.
In some cases you can get an 100% LTV mortgage, but you will usually have to provide another form of security, such as a family member who will use their own home as security on your mortgage.
There are only two ways to reduce your LTV: save up a larger deposit, or reduce the amount of money that you need to borrow.
If you’re close to an LTV threshold – 91%, for example – then it is probably worth saving up a little more money, or negotiating a slightly cheaper price on the property you want to buy. By crossing the 90% LTV threshold, you will likely save thousands of pounds in interest repayments over the next few years.
The other option, though you might not like it, is to find a cheaper home.
Last updated: 28 January, 2019
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