When buying a house in the UK, you’ll usually need a mortgage to do so.
The amount you borrow is an important detail.
Your loan to house value ratio is a direct reflection of your mortgage arrangement.
We’ve explained what this means in the article below.
What is a loan to value (LTV) ratio?
A loan to value ratio (LTV) (also written as loan-to-value ratio) is how large your deposit is compared to the amount you have borrowed.
In other words, how much of the purchase price is equity you’ve put down compared to the amount that’s paid for by a mortgage.
The higher your loan to value ratio, the greater a risk you’re considered by the bank.
Examples of a Loan to Value ratio
Let’s assume that you’ve bought a house worth £250,000.
Your loan to value ratio will vary accordingly:
- 90% LTV = £25,000 equity, £225,000 mortgage
- 80% LTV = £50,000 equity, £200,000 mortgage
- 70% LTV = £75,000 equity, £175,000 mortgage
- 60% LTV = £100,000 equity, £150,00 mortgage
- 50% LTV = £125,000 equity, £125,000 mortgage
As you can see, a lower loan to value ratio means that you’ve got more equity in the property.
This puts you in a stronger financial position. You’re considered less of a ‘risk’ by the lender.
What is a “good” ratio?
Most lenders consider anything under 80% to be a good ratio.
This makes it unlikely that you’ll ever fall into negative equity. And it means that you’ve put down a deposit of at least 20%, which is an excellent start.
The lower your loan to value ratio, the better it is. And remember that it doesn’t remain stationary once you put down your deposit and buy the house.
As you make monthly payments, you pay off more of the mortgage, and your ratio will thus move.
It’s almost always in your best interest to improve your loan to value ratio.
When you build up equity in the house, your monthly payments go down, and you pay less interest. You’ll also retain more when the time arrives to sell.
What’s the minimum loan to value ratio lenders will accept?
Each lender has their own unique acceptance for risk. Some will accept a 95% loan to value ratio, while many others won’t.
There’s even been stories of 100% LTV deals. However, these are very rare.
A mortgage broker can advise you on this. Some lenders move their criteria throughout the year, based on current conditions.
You could also contact the banks to get a clear sense of what they’re willing to put up with.
How to improve my loan to value Ratio
1. Save up a larger deposit
The first method is to save up more money for a deposit.
This allows you to put down a larger deposit when you first buy a house, which improves your LTV ratio. You can still do this after the purchase has taken place.
Most lenders allow you to increase your monthly payments, so the house is paid off faster. There may sometimes be early repayment charges associated with this.
2. Buy a less expensive house
A second solution is to decrease the price of the house you’re buying. This could be done by negotiating harder with the seller, so they agree to reduce their ask.
Or you could look for another property that’s more affordable. This might be because it’s smaller, or you’re looking in a less pricey area.
A final option is to look for financial assistance with your mortgage. There are some government initiatives that exist to support you in this scenario.
Shared ownership and ‘right to buy’ are two examples another.
How do I find out my loan to value ratio?
If you ask your lender, they’ll usually be able to give you this information.
For example, you might be unsure how the costs of running a house are impacting equity in the house. You also need to consider the costs of buying a house.
These could obscure your true ratio and ability to make mortgage repayments.
It’s possible to calculate your loan to value ratio by yourself.
You’ll need to find out how much equity you’ve built up in the house, along with the amount you’ve borrowed.
This is easy to work out at the point of purchase. But as your monthly payments tick by, it can be tricky.
How loan to value ratio changes as mortgage is paid
Each monthly mortgage repayment builds up a small amount of equity in the house. Over time, this will change your loan to value ratio.
You paya large percentage during the first ten years of your mortgage. But during later decades of repayment, each payment holds a larger chunk made up of equity.
Each mortgage deal is unique, meaning there’s no set rule for how the LTV ratio changes.
You can keep communicating with your lender as time passes. Or you could speak to a financial or mortgage expert for personalised guidance.
