What is ‘loan-to-value’ and how is it calculated?

Loan-to-value, or LTV, is one industry term you’re certain to come across when buying a property of your own. Whether you’re a first time buyer or an existing homeowner, the loan to value ratio matters, and is particularly important during the mortgage application process.

In this blog post, we take a closer look at the basics of LTV, and how and when it may be necessary to calculate the LTV of a property.

What is loan-to-value or LTV?

Put simply, the LTV ratio is the percentage of the price of the property you’re financing through a mortgage lender. The ratio compares the cost of the mortgage to the property value before displaying this as a percentage.

How is LTV calculated?

There are several loan-to-value calculators available on the net – including this one – yet it’s fairly easy to calculate the LTV of your purchase for yourself. All you need to know is the value of the property you intend to purchase and the amount of deposit you have or plan to have.

To calculate loan-to-value, simply minus your deposit from the property purchase price to determine the loan amount required to secure it. You then divide this loan amount by the property value, before multiplying the resulting figure by 100 to find the LTV as a percentage.

So, there’s the theory! Here Halifax provides an example of how the loan-to-value ratio works in practice:

“Loan to value ratio, or LTV, is the ratio of what you borrow as a mortgage against how much you pay as a deposit. Here’s how loan to value ratio works: You pay a deposit of £20,000 for a property worth £200,000. You get a mortgage of £180,000 to pay for the rest. Your deposit covers 10% of the house price. So, your LTV is 90%.”

When do lenders use the LTV ratio?

The loan to value or LTV ratio is widely used by lenders to decipher how much risk an applicant is taking on when applying for a mortgage.

It’s not just during the mortgage application process when calculating LTV is useful however. It is a baseline calculation that’s commonly used when purchasing a car with finance or taking out another secured loan.

Why does LTV matter when buying property?

The higher your loan to value, the higher the risk incurred by the lender. It is always better to have a lower LTV than a higher loan-to-value, with the former making it more likely that your mortgage loan will be approved.

A lower LTV ultimately means a better mortgage product. Property buyers who save heftier deposits need to borrow less, and enjoy lower interest rates and more manageable monthly repayments as a result. With this in mind, saving as much as you can to put towards your property purchase really is recommended.

There are of course some benefits to purchasing a property with a smaller deposit, and thanks to the reintroduction of 100% mortgages and the increasing number of 90 to 95% LTV mortgages available, doing just that is more possible than ever.

Taking advantage of these higher LTV products may mean higher monthly costs. But, they will allow you to buy a property sooner rather than later, which is invaluable to those who rent.

Want to find the best mortgage product for your needs?

Whatever your LTV, our experts can help you source the mortgage deals that work for your circumstances. Find your local mortgage advisor today to get started.