The term “loan-to-value” or “LTV” is a way to assess the lending risk for the lenders or any financial institution. A high LTV value generally means that the loan is considered riskier, so a mortgage approved with a high LTV will carry much higher interest rates due to the perceived level of risk on behalf of the lender.
But what about the other end of the scale, when someone needs to borrow far less about the value of the property? What is the lowest LTV (loan-to-value) mortgage available and who is eligible for these?
Loan-to-value is a ratio that assesses the lending risk for lenders before granting mortgages. The higher the value, the bigger the risk for the lenders.
Of course, lenders won’t take the risk if it doesn’t pay off. So, in this case, the interest rates will be higher. In addition, you might have to get mortgage insurance to make the deal less risky for the lender.
Private Mortgage Insurance (PMI) is a way to protect the lender if you aren’t able to pay back the money. If your case requires a PMI, the lender is likely to arrange everything with a private insurance company as part of the deal.
But that’s not the case with low LTVs. Lenders always prefer lower LTVs, but they’ll require you to come up with a big deposit.
Building equity means you’ll be increasing the difference between the property value and the amount of money you owe to the lender. When you request a loan at an amount that’s close to the property value, there’s little equity built up within the property.
If the loan goes into default or foreclosure, it won’t be easy for the lender to sell the property because the money they’ll make won’t be enough to cover the mortgage and still allow for some profit.
How to Calculate LTV
You don’t need to contact a lender to calculate the LTV ratio of the home you’re interested in. You can simply follow this formula:
LTV ratio = Mortgage Amount (MA) / Appraised Property Value (APV) x 100
Here’s an example to help you better understand the calculations:
Let’s assume you want to buy a house valued at £200,000. So, you make a down payment of £20,000, and you need to borrow £180,000.
In this case, the LTV ratio will be 90% (£180,000 / £200,000)
What Is the Lowest LTV Mortgage Available?
The lower your LTV ratio, the better your situation will be, but how low can you go?
Anything lower than 80% is considered a low LTV. Generally, you might be able to find 40% and 50% LTV mortgages. If you go any lower than that, you’re probably better off saving some money and buying the property right away.
However, an extremely low LTV means you’ll have to provide a large deposit (or have lots of equity) on the property. If that puts you in a tough position, you can pay a smaller deposit and get a loan with a reasonable interest rate.
It all depends on your circumstances and finances. All in all, we always recommend discussing your options with one of our qualified mortgage advisors to find you the best deal for your circumstances.
What Are the Mortgage Rates for 40% to 60% LTV Mortgages?
Mortgage rates for low LTV ratios depend on various factors, including the following:
- The lender’s policies
- The property value
- Your financial situation
- Overall financial conditions
Who Is Eligible for Low LTV Ratios?
With a mortgage ratio as low as 50%, you must be able to pay 50% of the property value to secure it. More importantly, you’ll need to prove that to the lender to get access to better rates.
Not only that, but you’ll also need to provide the lender with the following:
- Photo ID
- Bank statements of the current account for the last three to six months
- Tax return (form SA302)
- Payslips from the last three months
- P60 form
- Proof of benefits received
What Is the Highest LTV Mortgage Available?
The highest LTV ratio for a mortgage is usually around 95%. That allows you to borrow 95% of the value of the house you want to buy and pay a 5% deposit.
It’s also possible to get a 100% mortgage, but it’s not that easy. You’ll need guarantors, like parents, to take responsibility for the loan if you can’t make your payments on time. You’ll most likely have to get mortgage insurance, as this is a highly risky deal for lenders.
How to Reduce Your LTV Ratio
There are mainly two ways to improve your LTV. Let’s check them out:
Pay a Larger Deposit
By paying a larger deposit, you’ll be taking a smaller loan compared to the property’s value.
You might also consider asking your close circle for gift funds. These funds are like an extra push into your dream home.
Relatives, close friends, and employers can contribute to your down payment. However, these funds must be documented so that the lender can confirm the source of the money.
This helps the lender ensure that this isn’t a loan in disguise to get a better rate.
Consider a Cheaper House
We understand how sad it is to give up on your dream house, but if things aren’t working out financially, it might not be the perfect house for you after all.
It’s no fun having to aim lower down the house ladder, yet, it’ll be a lot less complicated than struggling to make ends meet and defaulting on repayments
Which LTV Is Best for Me?
As we’ve mentioned, the lower LTV is always the better option, if you can really afford the required deposit. With a larger deposit, you’ll have access to better mortgage deals and lower repayments, so it is advisable to go as low as you can, but don’t put yourself in a tight situation by paying an overly large deposit.
There actually might be some advantages for moderate LTVs. For starters, you’ll be able to get the property sooner and save on rent. Additionally, when it comes to property prices, they are almost always on the rise, so you can benefit from that price increase while you’re paying off your loan.
All in all, you need to find the right balance, depending on how much money you’ll be able to pay as a deposit.
How to Find the Right Balance
It all depends on your financial situation. You need to take a close look at your savings, expenses, and income.
Since it’s a monthly commitment, many experts recommend keeping your mortgage at less than 28% of your salary. That should include all the necessary mortgage payments, like private mortgage insurance.
All in all, your mortgage should never exceed 45% of your net income after paying taxes. You don’t want to find yourself in a tight spot and default on your repayments.
Low LTV mortgage conclusions
So, what is the lowest LTV (loan-to-value) mortgage available? Well, anything lower than 80% is considered a good LTV. Generally, LTVs can go as low as 40% and 50%, and the lower the LTV, the better deals you’ll be able to get.
However, going too low isn’t ideal either. You need to find a good balance that allows you to secure the property without overextending you financially, due to having to provide a deposit higher than you can realistically afford.
If you are seeking a low LTV mortgage, speak to When the Bank Says no and we’ll find you the right lender and deal for your circumstances.