What is Loan-to-Value and Why Does It Matter?

To calculate your LTV, divide the mortgage amount by the property value and multiply the result by 100:

Mortgage amount ÷ property value × 100 = loan-to-value percentage

For example, if you are buying a property for £200,000 with a £180,000 mortgage:

£180,000 ÷ £200,000 × 100 = 90% LTV

You would therefore have a 90% loan-to-value mortgage and provide the remaining 10%, or £20,000, as your deposit.

As another example, a £150,000 mortgage against a property worth £200,000 would produce an LTV of 75%:

£150,000 ÷ £200,000 × 100 = 75% LTV

The remaining £50,000 represents the equity or deposit in the property.

When you are buying a home, the lender will normally arrange its own mortgage valuation. The maximum mortgage is generally based on the lower of the agreed
purchase price and the lender’s valuation.

For example, imagine you agree to buy a property for £250,000 and want to borrow £225,000. This would initially appear to be a 90% LTV mortgage.

However, if the lender values the property at £240,000, borrowing £225,000 would represent an LTV of 93.75%. That could take the application outside the chosen product’s maximum LTV.

You might then need to contribute a larger deposit, renegotiate the purchase price or consider another mortgage option. This is one reason why the estate agent’s asking price should not be treated as a guaranteed mortgage valuation.

When remortgaging, the lender will usually calculate LTV using the outstanding mortgage and its current assessment of the property’s value.

Your LTV gives the lender an indication of how much equity sits between the mortgage balance and the value of the property.

A lower LTV usually represents less risk to the lender because there is a larger financial cushion if the property has to be sold. A higher LTV leaves a smaller margin if property prices fall.

As a result, your LTV can affect:

• The mortgage products available to you
• The interest rate you may be offered
• The deposit you need
• The lender’s credit-scoring requirements
• Certain aspects of its lending criteria

A lower LTV does not guarantee that an application will be accepted. The lender will still assess your income, expenditure, credit history, property and overall circumstances. However, a stronger LTV can give you access to a wider or more competitively priced selection of products.

Mortgage products are commonly arranged into LTV bands, such as:

• 95% LTV
• 90% LTV
• 85% LTV
• 80% LTV
• 75% LTV
• 60% LTV

The exact bands and products vary between lenders and can change over time.

In general, putting down a larger deposit and moving into a lower LTV band may provide access to a better mortgage rate. For example, an 85% LTV product may be more competitive than a comparable product available at 90% LTV.

The difference is not always the same, though. Moving from 90% to 85% could produce a worthwhile saving, while reducing your LTV from 58% to 55% might make no difference if the lender places both applications within the same product band.

Many lenders reserve some of their most competitive products for borrowers at or below 60% LTV, but this is not a universal rule. Occasionally, a lender may introduce a product at a lower band, such as 50% LTV, or offer similar rates across several bands.

It is therefore worth comparing the actual products rather than assuming that every reduction in LTV will automatically result in a lower rate.

For first-time buyers, the LTV is largely determined by the size of the deposit.

If you buy a £250,000 property with a £12,500 deposit, you would need a £237,500 mortgage. This represents 95% LTV.

Increasing the deposit to £25,000 would reduce the mortgage to £225,000 and the LTV to 90%.

A larger deposit could open up more mortgage options and potentially reduce the interest rate. It may also provide some protection against falling into negative equity, which happens when the mortgage becomes greater than the property’s value.

However, using every available pound as a deposit is not automatically the right choice. You may also need money for legal costs, surveys, moving expenses, repairs and an emergency fund.

The potential mortgage saving should be balanced against the importance of keeping suitable savings available after you move.

When remortgaging, your LTV is calculated using the mortgage balance at that point and the property’s current value.

Your LTV may have improved since buying the property because:

• Your regular repayments have reduced the mortgage balance
• You have made overpayments
• The property has increased in value
• Improvements have added value to the property
• A combination of these has occurred

For example, suppose your property is valued at £300,000 and your remaining mortgage is £183,000. Your LTV would be 61%.

Reducing the balance by £3,000 would bring the mortgage down to £180,000, producing an LTV of 60%. If 60% products are more competitive at the time, making that payment could provide access to a better deal.

This does not mean paying £3,000 off the mortgage will always be worthwhile. The potential interest saving needs to be compared with the amount being paid, any early repayment charge and the value of keeping the money in savings.

Home improvements may increase a property’s value and therefore reduce its LTV, but there is no guarantee that the lender’s valuation will rise by the amount you have spent.

Some work may make a home more attractive without adding an equivalent amount to its market value. Larger projects, such as an extension or substantial renovation, may have a greater effect, but the result will depend on the property and its local market.

If you are planning significant improvements close to a remortgage, it may be worth discussing the timing. Completing the work first could improve the valuation, but you should not rely on a particular figure until the lender has assessed the property.

LTV does not always move downwards. It can increase if:

• Property prices fall
• You borrow more against the property
• Interest is added to the mortgage balance
• The property is valued below your expectations

For example, a £180,000 mortgage against a £200,000 property represents 90% LTV. If the property’s value fell to £190,000 while the mortgage remained at £180,000, the LTV would rise to approximately 94.7%.

A higher LTV at remortgage could reduce the number of available products, particularly if it moves you into another lending band.

Depending on your circumstances, you may be able to reduce your LTV by:

• Providing a larger deposit when purchasing
• Making regular mortgage repayments
• Making permitted overpayments
• Paying a lump sum off the mortgage
• Completing improvements that genuinely increase the property’s value
• Avoiding unnecessary additional borrowing secured against the home

Before making a large payment, check whether your mortgage has an overpayment limit or early repayment charge. It is also sensible to compare the likely mortgage saving with the benefit of retaining accessible savings.

Loan-to-value is important, but it is only one part of choosing a mortgage. The lowest advertised rate may not provide the best overall value once arrangement fees, valuation costs, incentives and the length of the deal are taken into account.

At Crescent Mortgages, we can calculate your current LTV, identify whether you are close to another product band and compare the available options. If paying a little more towards the deposit or mortgage could make a meaningful difference, we can show you the figures so you can decide whether it is worthwhile.

Our mortgage advice is fee-free, so you will not pay us a broker fee for arranging your mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.