What is LTV (Loan to Value)!

What is LTV you ask? The Loan to Value put simply is the level of debt divided by the value of the property expressed as a percentage

It’s a key ratio mortgage lenders use to evaluate risk and works on a sliding scale.

Basic formula:- Debt / Property Value

Where things become interesting is
- What is included in the “Debt” figure?
- “Property Value” according to who?

What debt figure is used?
The debt figure is usually the “secured” or “mortgage” debt.

So you can do your calculations 2 ways.
Firstly, just take your mortgage figure and divide by the value of your property (then multiply by 100 to give a %)
Secondly, if you’re looking to consolidate credit cards or other debts or even capital raise, then add this figure to your mortgage then divide by the value of your property (then multiply by 100 to give a %).

What is the property value.
When trying to establish what is ltv unfortunately the figure you believe your property to be worth is rarely used. It is based on a professional qualified and certified valuers’ report on the condition of the property and the sale value of similar properties in the area. This is where it becomes subjective and frustrating. It is “Sale” prices not advertised prices and therefore what a real estate agent suggests you could get for your property is rarely the figure used. The valuer often uses a “quick-sale” formula. The effect on this is a lower property value meaning lower borrowing for you and a greater safety margin for the bank.

How to calculate what is your LTV Ratio:
If your mortgage is £80,000 and your house is worth £10000 your LTV is 80%

Or simply use the ltv calculator or look at our other calculators to consider term, overpayments and debt consolidation

How banks use Loan to Value.
It is an indicator of risk to the bank whether they would get their money back should you default on your mortgage.
For Example, if 75% LTV was lent on a property then that is £75,000 on a £100,000 property. If the bank had to repossess the house and sell it, it is highly unlikely (and therefore less risk) that they would loose any money (ignoring legal fees and charges).
However, if they lent 95% or £95,000 on the same £100,000 property then they are very likely to loose money if they have to foreclose.

What this means to you.
The higher the loan to value ratio, the higher the interest rate to reflect the risk.
Banks lend on a sliding scale in 5% increments. Basically one rate for 75% and lower, slightly higher for 80%, higher again for 85% and so on.

There are some lenders who will look at 125% LTV (meaning lending more than the property is worth) but these are few and you would need to be considered a “prime mortgage” borrower. Reread What is LTV

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