Trying to find a mortgage can be tough, especially if you’re a first-time buyer.
Decoding the jargon used by banks and lenders adds an extra layer of confusion and can feel like a challenge all of its own.
However, most of the technical words that lenders use actually refer to very simple concepts, and it is important to understand them if you want to get the best deal for your mortgage.
One concept which is very important in determining which mortgages are available to you is ‘loan to value’ or LTV.
What Is LTV?
Loan to value described the size of a mortgage in proportion to the total cost of the property.
It is very rare (though not impossible) to get a mortgage for 100% of a property’s value. Instead, most people pay for part of the property themselves- this portion is called a ‘deposit’. The deposit can be anywhere from 5%+ of a property’s value. The rest is topped up with a mortgage.
The LTV is shorthand for how much of a property needs to be paid for with a mortgage. For example, if you only have a 10% deposit, you’ll need a mortgage for the other 90%. This means there is an LTV of 90%.
You can work out the LTV for your deposit on a particular property by using percentages. Divide your deposit by the value of the house and then multiply the answer by 100: that’s your LTV. For example:
- Deposit = £20,000
- House = £367,000
- 20,000 ÷ 367,000 = 0.054
- 0.054 x 100 = 5.4
- The LTV is 5.4%
As you pay off your mortgage over time, your LTV will change. This is because although the value of your home remains relatively constant, the debt you have is always decreasing.
If you decide to remortgage or move house, later on, your LTV will, therefore, be lower than when you took out your first mortgage.
Average LTV Ration on Mortgages Across the UK, by Region
|Region||Average LTV on Mortgaged homes|
|Yorkshire and the Humber||75%|
|East of England||66%|
|Central & Greater London||60%|
Why Is It Important?
LTV is one of the main factors affecting the cost of a mortgage. There are two ways the LTV does this.
Firstly the size of your deposit affects how much you need to borrow. The less you borrow, the less you end up paying back: you won’t pay as much in interest, your payments will be lower, and the term of your loan will be shorter.
Secondly, lenders use LTV as a risk assessment tool. The more money the mortgage provider has to put forwards, the more they stand to lose if the mortgage is not paid back. This means that high LTV loans are considered riskier for lenders.
To offset this risk, lenders charge higher interest rates on mortgages with a high LTV. This helps them recover their investment sooner and earns them more profit over the term of the loan, seen as a reward for taking on more risk.
What Is a Good LTV?
As a rule of thumb, the lower the LTV, the better.
Low LTV these mortgages carry less risk for the lender, which means you are more likely to be offered a good interest rate. A low LTV also means that you are taking on less debt, which means you can be mortgage-free sooner.
Anything below 80% is considered a low LTV, whereas LTVs between 80-100% are considered high.
Are High LTV Mortgages Safe?
High LTV mortgages can be a great option for first-time buyers, as they can lower the barrier for entry onto the property market. While the average salary in the UK is £29,000, the cost of the average first-time home is more than £232,000 – it’s not hard to see how saving even a 10% deposit could take a long time.
However, there are some things you should consider before taking on a high LTV mortgage.
High LTV mortgages come with high-interest rates because lenders see them as risky. Borrowers with high LTV mortgages are more likely to default on their loan.
To offset the risk of losing their investment, lenders charge more interest. This means you will end up paying much more over the lifetime of the loan in interest charges than someone with a lower LTV.
There is also a risk of negative equity arising in high LTV mortgages. Negative equity is when you owe more to your lender than your home is worth. This can happen very easily on high LTV mortgages is house prices crash.
For example, if you take out a 95% mortgage on a house worth £200,000, you only own £10,000 of the property outright.
If house prices were to fall, you only have a buffer of £10,000 before you find that your mortgage is worth more than what you can sell the house for. The only way to escape this situation is to buy a cheaper property.
What’s the Average LTV According to Age?
|Age||Most common LTV range|
|18 – 25||85 – 90%|
|26- 30||75 – 85%|
|21 – 35||50 – 70%|
|36 – 40||50 – 70%|
|41 – 45||50 – 70%|
|46 – 50||50 – 70%|
|51 – 56||50 – 70%|
|56+||50 – 70%|
Can I Get a Mortgage With 100% LTV?
Although it is possible to get a 100% LTV mortgage, it is rare these days due to the risk associated with them. Lenders require you to have some kind of guarantor for most 100% LTV mortgages, such as parents to co-sign your loan or family savings to offset the debt.
High LTV loans in general can be risky, but with a 100% LTV mortgage the risk of negative equity is even higher.
How Can I Lower My LTV?
There are two approaches you can take when trying to lower your LTV.
By waiting longer to buy your first home, you can save more money to put towards a deposit. This means you will need to borrow less to buy your home.
Although it may be frustrating having to delay your purchase, you will be able to reap the benefits of lower interest rates and may shave years off your mortgage in the long run.
Buy a Cheaper House
Another way you can increase your LTV is by looking for properties that are less expensive. By opting for a home which is smaller, or in need of some TLC, you can save money.
This increases the proportion of the home, which will be paid for by your deposit in relation to the mortgage.
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best mortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.