The lower your loan-to-value the lower your rate will be – but what on earth does this mean? Darren Polson busts a key piece of mortgage jargon for a first-time buyer
The Question
My parents are helping me buy my first home and they keep talking about loan-to-value with the broker. I don’t know what it means and, since I am about to become a homeowner, I feel slightly embarrassed bringing this up in our calls! Can you explain and help me understand, please?
Darren’s Answer
Please don’t be embarrassed, buying your first home is an exciting and nervous time with a lot of jargon that you will not be used to.
Regarding loan-to-value (or LTV as it is commonly known), this is displayed as a percentage and can be calculated by using the amount you borrow against how much the property is valued at.
Divide your deposit by the property value and multiply by 100.
Most mortgage calculator tools can work this out for you, as can your mortgage broker.
For example, if you purchase a property for £200,000 and you have a £20,000 deposit, your loan-to-value ratio would be 90%.
You will often hear people say that you are better to have a bigger deposit. This is because if you have a high LTV ratio, you may be offered higher rates, which means higher monthly payments.
Generally, the lower the LTV, the lower the interest rate. Lenders will see this as a positive as the mortgage will be more affordable. All lender products are based on the LTV bracket you are in. This will be discussed with you prior to the application as you will need to apply for one of these rates.
Please note that lenders will only lend based on the value of the property. This mean that if you have an offer accepted above this value, you will need to fund the difference yourself.
Using the example above, if you purchase a property for £210,000 but the value of the property is £200,000, your loan to value ratio would be 90%, however, you will need a deposit of £30,000. This is the additional £10,000 above the value of the property.
It is great to hear that you have a mortgage broker supporting you, I am sure they will be happy to support you in the process. And remember, there are no silly questions!
Meet our expert…
Darren Polson is head of mortgage operations at Aberdein Considine. He has been writing a regular column for What Mortgage for over two years and is now here to answer YOUR questions.
If you have a question for Darren please email kate.saines@emap.com or leave a message in the comments below.
