The loan to value ratio (or LTV ratio, as it’s commonly abbreviated to) essentially explains your mortgage deal in a nutshell. It shows how much money you borrow vs the deposit amount you put down in relation to the property value. That’s probably not the most exciting explanation you’ll hear, but we’ll try to illustrate what constitutes a low or high LTV ratio below with examples to really help you get to grips with loan to value ratios and what makes a good or bad one for you.
Remember, a mortgage calculator can give you an idea of what your loan to value ratio might look like and, if you know the deal your mortgage lender could offer you, then you can get a good idea about what your mortgage repayments might be each month. What it can’t tell you? What a good LTV is. Our guide today will help you understand LTV ratios better and ensure that you know what a good LTV looks like, what it means for you each month in terms of the repayments you’ll make, and how to improve your LTV ratio if you’ve realised you might be about to enter a mortgage deal with a bad one.
What Is Loan To Value (LTV) Ratio Anyway?
Your LTV ratio sums up your mortgage loan in a single percentage that shows you how much of the property value you have borrowed from a mortgage lender compared to the deposit you put down. For example:
- Property value: £100,000
- Deposit: £15,000
- Mortgage loan: £85,000
- LTV ratio: 85%
The numbers aren’t usually that kind to you when it comes working out your LTV ratio yourself, so you can either use an online calculator to figure out the ratio, or else follow this simple formula:
(Mortgage loan divided by property value) multiplied by 100.
This provides you with a quick summary of your mortgage deal, and it also communicates to your mortgage lender the amount borrowed vs the deposit given. That’s key information for lenders, because it helps them determine what deals they can offer you.
Why Are LTV Ratios Important?
A lower LTV ratio means a more competitive mortgage rate deal. If you’re able to show mortgage lenders that you’re less of a borrowing risk because you already covered a larger portion of your property cost yourself, making your loan smaller, then you can get a more competitive interest rate on the loan. Why? Because there is less risk involved in lending to you from the point of view of your mortgage lender because you’ve already proven yourself more financially responsible by saving such a significant deposit.
A high LTV ratio, whilst not a red flag to lenders, will certainly act as a signal to them when it comes to working out how much of a risk you really pose. Higher LTV ratios indicate that they’ll need to lend you more for your property – the more money a lender has to lend to a person, the higher the risks are. To mitigate these risks, interest rates tend to be higher, meaning a worse overall deal for you as a borrower.
Let’s imagine for a moment the following scenarios:
| Scenario 1 | Scenario 2 | |
| Property value | £170,000 | £170,000 |
| Deposit | £20,000 | £70,000 |
| Amount borrowed | £150,000 | £100,000 |
| LTV ratio | ~88% | ~58% |
| Interest rate | 5% | 2% |
| Total amount repaid | £263,162 | £127,179 |
As you can see, the higher your loan to value ratio, the higher your interest rates are likely to be and therefore your mortgage isn’t as ideal as it could be because you ultimately pay more back. But what makes a good or bad LTV ratio?
What Is A Good LTV Ratio For Me?
A low LTV is generally better for you as the borrower because it will cost you less to borrow. The less money you put towards your home purchase via a deposit, the higher risk you seem to mortgage lenders. A smaller deposit will bar you from getting the most competitive deals, but with the help of a specialist mortgage broker like When The Bank Says No, you can find mortgage lenders willing to lend for a higher LTV.
To find the best deals, you’ll need to increase the deposit you put down to reduce the amount you borrow and find the most competitive mortgage rates.
If reducing your monthly payments is key, then a good LTV will be the biggest impact on that for you. Mortgage insurance and other necessary payments won’t be impacted, but you can land a better interest rate deal on your mortgage by reducing how much you borrow.
Good LTVs look different for everyone, but as a general rule the following categories typically apply:
- 95-85% LTV – high LTV mortgages, likely to have higher interest rates
- 75-85% LTV – standard LTVs, likely to get standard interest rate offers
- 60-75% LTV – good LTVs, the further down the scale you go here, the more competitive the deals get
- 60% LTV or less – very strong LTV, will almost certainly have the best deals open to you
How To Improve Your LTV Ratio
Getting on the property ladder is never as simple as it sounds, but there are two things you can do to get a better mortgage deal with a lower LTV ratio:
Save A Larger Deposit
Easier said than done, we know, but if you could delay the purchase of your home for a while whilst you save a larger deposit, then you will have a much better LTV ratio making your mortgage deals better for you.
This isn’t always realistic, however, so you might want to consider the second option.
Look For A Different Property
This is also hard if you’ve got your heart set on a property, but if you haven’t found a dream home just yet, then now is a great time to review your budget and consider affordability long term. At the end of the day, you don’t want to pay too much for the privilege of borrowing from your mortgage lender, so by sticking with your current deposit but finding a more competitively priced property, you can lower your LTV ratio, show you’re a lower risk, and enjoy lower interest rates as a result.
Ultimately, it’s about looking at your finances as they are and setting a realistic budget to help ensure the best deals for you.
What Is A Good Loan To Value Ratio Summary
You can bring down your LTV ratio by saving a larger deposit and covering more of your house purchase yourself. That means you require less from your mortgage lender, which brings down risk and interest rates so you actually pay back less overall for the privilege of borrowing.
LTV ratios aren’t confusing. They’re a simple, clear way to show how much you’ve put towards the value of your property vs the money you’ve had to borrow from a mortgage lender. Understanding LTVs and using your knowledge to figure out a reasonable budget that allows you to afford your dream home whilst reducing the cost of borrowing and ensuring your monthly repayments are manageable is key.
Strike the right balance and you can get a great deal on your mortgage. If you need support due to a bad credit history or if you have faced rejection from high street banks in the past, then work with our experts at When The Bank Says No today – we can put you in touch with specialist mortgage lenders who are more than willing to consider you no matter your credit history.