At a glance
Loan to value (LTV) is a measure of how much you can borrow compared to a property’s value.
Lenders use LTV to help decide whether to approve a mortgage application and on what terms.
Mortgages with a low LTV typically qualify for lower interest rates.
You could get a mortgage with a lower LTV by choosing a cheaper home or saving for a larger deposit.
What is loan to value?
The loan-to-value (LTV) ratio is a measure of how much you’re borrowing as a percentage of the value of the property you’re buying. So, for example, a 90% loan-to-value mortgage means you’re borrowing 90% of what a property is worth.
If you’re thinking about buying a house, chances are you’ll come across this phrase. Although it’s a term that can be applied to any secured loan, it’s most commonly used in relation to mortgages.
The loan-to-value ratio is one of the main factors that lenders look at to help them decide whether to approve a loan, and what the specific terms of that loan should be.
The higher the LTV, the greater the risk to your mortgage provider – and if it’s too high, your mortgage may not be approved. Meanwhile a lower LTV could help you secure a mortgage offer with lower rates.
How is loan to value calculated?
The loan to value is the ratio between the value of the loan (mortgage) you take out and the value of the property. It’s shown as a percentage.
There are LTV calculators available online, but it’s a simple formula that you can easily do on your phone.
LTV = (loan amount ÷ property value) x 100
For example, if you’re buying a house worth £500,000 and you’re looking for a mortgage of £300,000 then here’s how to work out the LTV:
Loan amount of £300,000 ÷ property value of £500,000 = 0.6
0.6 x 100 = 60
LTV = 60%
Why is loan to value important for your mortgage lender?
For your lender, the LTV is an indicator of the potential loss they’d make if you defaulted on your payments.
Lenders rely on the fact that if you can’t repay your mortgage, they can sell your house to get their money back. The closer the loan amount is to the total value of the property, the greater the risk that the mortgage lender might not recover their loan if house prices drop.
For that reason, some lenders may not approve a mortgage application if the LTV ratio is too high, or they may charge higher interest rates to account for the greater risk.
Why is loan to value important for you?
As a rule, mortgages with a lower LTV tend to come with lower interest rates. But to secure a mortgage with a low LTV you’ll need to have a larger deposit.
Other factors can affect the interest rate and mortgage terms you’re offered, though, like your credit rating.
If you have a poor credit rating, you may only be offered low LTV mortgages. That’s because borrowing less means a lower risk to you when it comes to making repayments, as well as for your lender.
What’s considered a good loan-to-value ratio?
Unlike the rating provided by your credit score, there’s not a single figure to represent a ‘good’ loan-to-value ratio.
Generally, the lower the loan to value, the fewer the risks for all involved – you and your lender.
If you want to get a mortgage, it’s a case of balancing how much you can afford in monthly payments against the size of the deposit you have available. If you don’t have much money for a deposit, a higher LTV mortgage is one way to get your hands on the keys to a new home.
How to reduce your LTV
There are two main ways to reduce your loan-to-value ratio:
Save for a bigger deposit. The larger your down payment, the more money you’re likely to save in the long run. If saving a bit extra is enough to knock you down into a lower LTV band and get a more favourable interest rate, it could lead to considerable savings over the lifetime of the mortgage.
Set your sights lower. While we all tend to have a dream house in mind, buying something that’s smaller or in a less desirable location will make your money go further and reduce your LTV. You can also try negotiating on the purchase price.
FAQs
What are LTV bands?
Most mortgage lenders separate their mortgages into loan-to-value bands, which usually go up in increments of 5%. With each band, you qualify for a different mortgage rate.
If you can find a bigger deposit – even by just a few thousand pounds – or a cheaper property, you might be able to drop into a lower LTV band. This can then give you a better rate and save you potentially thousands of pounds across the full term of the mortgage.
Why do lenders offer 95% mortgages?
Some lenders offer 95% mortgages to help first-time buyers get on the property ladder with only a small 5% deposit.
Lenders can offer these types of riskier mortgages because they are backed by the UK government’s Mortgage Guarantee Scheme, which can compensate lenders for a portion of their potential losses.
However, the same credit checks apply, and you’ll have to prove that you can afford the monthly repayments. So, it can still make sense to wait, if you can, and save for a bigger deposit.
How does LTV affect re-mortgaging?
Unless you have an interest-only mortgage, you’ll be slowly shrinking the size of your mortgage balance with every monthly repayment – and gradually reducing your LTV at the same time.
It depends on how the value of your house has changed over time, though. If your home has gone up in price, then your loan-to-value ratio may be even lower. But if it has gone down in value, your LTV could be higher.
If your mortgage allows it, you may also be able to make extra payments without having to pay a penalty (typically up to 10% of your mortgage balance each year). One of the benefits of overpaying your mortgage is lowering the LTV of your mortgage so you can access more competitive rates if you decide to remortgage.
If my house price drops, what happens to my LTV?
If the value of your property goes down, your loan-to-value ratio is likely to go up. If the value of your property drops to a point where it’s worth less than the mortgage you have on it, you’re in what’s known as negative equity.
For example, if you borrowed £190,000 to buy a £200,000 house, your LTV would be 95%. However, if the value of your home dropped to £185,000 and you still owed £190,000, your LTV would increase to 102.7%.
This is one reason to opt for low LTV mortgages if you can, as they offer you a bigger buffer against falling house prices.
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With over 10 years’ experience writing, editing and managing content, Emma has written and edited for some of Australia’s leading financial comparison brands, including Savings.com.au, Your Investment Property Magazine, and Your Mortgage.
Ele Clark is an award-winning editor who has held leadership roles at Which? and news-stand publications in London and Dubai. She’s appeared across the press and media, including BBC’s Panorama. With almost 20 years’ experience in personal finance, insurance and consumer journalism, she leads a talented team at Compare the Market, creating insightful, accessible content to help people make informed financial decisions.
Charlie is a senior commercial leader with close to a decade of experience across the UK’s leading personal-finance and comparison platforms. Before joining Compare the Market as Head of Commercial in 2024, he held senior commercial roles at TotallyMoney and MoneySuperMarket Group.
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