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 ratio?
A ‘loan to value ratio’ refers to how much you’ve borrowed to buy your house.
In other words, how much of the purchase price is equity that you’ve put down, compared to the amount that’s paid for by a mortgage.
The higher your loan to value (LTV) ratio, the greater a risk you’re considered by the bank.
For example, if you’ve got an LTV ratio of 90%, this means that 90% of the total house purchase price is paid for using a mortgage. You’ve thus only got 10% equity in the property.
Meanwhile, if you’ve got a ratio of 60%, this means that the remaining 40% is paid for using equity that you’ve built up in the house. You can see examples of this in the section below.
Examples of a Loan to Value ratio
Let’s assume that you’ve bought a house valued at £250,000. Your loan to value ratio indicates how large your deposit is, compared to the amount that’s borrowed. See our calculations below based on a £250,000 selling price:
- 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. And you’re considered less of a ‘risk’ by the lender.
What is considered a “good” ratio?
Most lenders consider anything under 80% to be a good ratio. This makes it extremely 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 slowly 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 being accepted. Although these are very rare, and even more unlikely given the fluctuating economic conditions of the past few years.
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 directly to get a clear sense of what they’re willing to put up with.
How to improve my Loan to Value Ratio
There’s only a couple of ways that you can improve your loan to value ratio. These are described below.
Save up more money
The first method is to save up more money. 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.
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 is one example. And ‘Right to Buy’ is 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 could be unclear on the answer, if you’re unsure how much your monthly payments are impacting equity in the house.
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 does my Loan to Value ratio change as I pay off the mortgage?
Each monthly mortgage repayment builds up a small amount of equity in the house. Over time, this will change your loan to value ratio.
Keep in mind that the interest you pay represents a huge percentage during the first ten years of your mortgage. But once you move into 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 touching base with your lender as time passes. Or you could speak to a financial or mortgage expert, for personalised guidance on how it’ll change as the years pass.
