What is Loan-to-Value Ratio and How Does it Affect Your Mortgage

When applying for a mortgage, the loan-to-value ratio (LTV ratio) plays a big part in determining your mortgage options, approval chances and the interest rates you’ll be offered based on how much equity is in the home at the time of purchase. Yet, many borrowers don’t fully understand what it means or how it affects their mortgage deal and the maximum loan they are eligible for.

Your loan-to-value (LTV) is the percentage of the property value you’re borrowing compared to the deposit you’re putting down. It helps lenders assess the risk of lending to you. Whether you’re climbing the property ladder for the first time or looking for the right mortgage to remortgage or buy your next home, understanding LTV bands can save you money and open up better mortgage deals.

In this article, you’ll learn what a loan-to-value ratio is, how to calculate it, and why it matters. You’ll also find tips on how to improve your LTV ratio and get more attractive mortgage products.

How Do You Find Your Loan-to-Value (LTV) Ratio?

To calculate loan-to-value ratio, you divide your loan amount by the appraised value or purchase price of the property, whichever is lower, then multiply by 100 to get a percentage.

Let’s say you’re buying a house with a purchase price of £300,000, and you have a deposit amount of £30,000; your mortgage loan will be £270,000. The calculation looks like this:

£270,000 ÷ £300,000 x 100 = 90% LTV

This only means that you’re borrowing 90% of the value of the property; you own 10% equity through your deposit. The lower your LTV, the more equity you have in the property, which lenders see as less risk.

Why Does Your Loan-to-Value Ratio Matter?

Your LTV ratio can affect different parts of your mortgage, which include

Interest Rates and Mortgage Products

Lenders generally offer their best mortgage rates to borrowers with a good loan-to-value ratio, usually 60% or less. Good LTV mortgages, alongside other factors like having a higher credit score, mean you have higher equity and less risk, so you can often get:

• Lower interest rates (sometimes called fixed rates for better stability)
• More mortgage products and options
• Fewer requirements for mortgage insurance

Conversely, high LTV loans (above 90%) are considered to have greater risk and may get:

• Higher interest rates, sometimes with mortgage rates 1-2% higher than lower LTV deals
• Some lenders may require borrowers to undergo stricter affordability checks
• Limited product availability and options
• Potentially mandatory insurance or indemnity

The maximum LTV varies between lenders, and high LTV mortgages often have higher mortgage rates.

Mortgage Insurance Requirements

If you have a high LTV ratio, over 80%, most mortgage lenders will require insurance to protect themselves against negative equity. This cost is usually passed to you as the borrower and increases your upfront or monthly payments.

Approval Chances and Risk

A high or low LTV affects your chance of mortgage approval. With very little equity (high LTV), lenders see you as a bigger risk, especially if you have lower credit scores or unstable income. A bigger deposit and lower LTV improve your chances and can speed up the mortgage application process.

Common Loan-to-Value Ratio Thresholds

Understanding the different LTV bands can help you set realistic deposit goals:

• 95% LTV and Above: Requires a small deposit (5%), limited mortgage options, higher rates and often insurance. 95% LTV mortgages are uncommon unless you take advantage of a mortgage program like Help to Buy in Wales.
• 90% LTV: Common for first-time buyers using government schemes; more options but still higher rates.
• 85% LTV: A good balance, offering better rates and product choice.
• 75% LTV: Considered a good LTV by most lenders; access to competitive rates.
• 60% LTV and Below: Lowest risk category; best mortgage lenders’ price and most flexible terms.

Factors That Affect Your Loan-to-Value Ratio

Property Valuation and Market Changes

Your LTV ratio is based on the appraised value of the property at the time of your mortgage application. If the prices of houses rise after purchase, your LTV improves as you gain more equity. If prices fall, your LTV worsens, potentially limiting your mortgage options when remortgaging or selling.

Deposit Size

A bigger deposit reduces your LTV and increases your equity, giving you better rates and access to products.

Outstanding Mortgage Balance

Over time, as you make monthly payments on a repayment mortgage, your mortgage balance decreases, improving your LTV.

How to Calculate Your Loan-to-Value Ratio

Use an LTV mortgage calculator or do this simple calculation:

LTV = Mortgage Loan Amount / Property Value X 100

Example: £200,000 mortgage loan and £250,000 property value:

200,000/250,000X100 = 80% LTV

Ways to Improve Your Loan-to-Value Ratio

Save a Bigger Deposit

Putting down a bigger deposit is the quickest way to lower your LTV. This might mean waiting longer to save or getting help through gifted deposits or family offset mortgages.

Buy a Lower Priced Property

Buying a property with a lower purchase price can improve your LTV without increasing your deposit.

Make Overpayments

If you already own a home, making extra payments on your mortgage reduces your remaining mortgage balance, lowering your LTV and helping you get lower loan-to-value mortgages when you remortgage.

Wait for Property Value Growth

An increase in house prices can improve your LTV, but this depends on market conditions.

How Your LTV Affects Mortgage Options

• High LTV mortgages (90-95%) may limit your lender choices and costs, but government-backed schemes can help.
• Mid-range LTV (75-85%) balances deposit size and affordability.
• Low LTV mortgages (under 75%) give you the best rates and most flexibility.

Work with a Mortgage Broker to Get the Most Suitable Deal

Navigating loan-to-value ratios and mortgage products can be complicated. A mortgage broker can help you understand how your loan-to-value affects your options and find competitive mortgage deals for you.

Using their expertise and access to many lenders, brokers can often get you a better rate and terms than you could on your own.

Conclusion

Your loan-to-value ratio is a key number that determines the mortgage amount you can borrow, the interest rates you’ll pay, and the products you can have. The lower your LTV, the better your chances of getting a good mortgage with affordable monthly payments.

Save a bigger deposit, manage your mortgage well and seek professional advice, and you can improve your LTV ratio and be in a good position for your home purchase or remortgage.

Eden Hawk Financial Solutions is here to support your financial goals and help you secure a mortgage, even with a high LTV. We’ll explore your options, offer comprehensive financial advice, and help you find a suitable loan for your personal circumstances.