LTV Explained
Loan-to-value (LTV) is the ratio of your mortgage balance to the value of your property, expressed as a percentage. For example, if your property is worth £300,000 and you owe £180,000, your LTV is 60 per cent.
The calculation is straightforward: divide your outstanding mortgage balance by the property value and multiply by 100. In the example above, £180,000 divided by £300,000 equals 0.6, which is 60 per cent LTV.
Lenders use LTV to assess how much risk they are taking. A lower LTV means you have more equity in the property, which reduces the lender's risk. As a result, borrowers with lower LTVs generally have access to better interest rates.
How LTV Affects Your Mortgage Rate
Mortgage rates are typically offered in LTV bands. The most common bands are 60 per cent, 75 per cent, 80 per cent, 85 per cent, and 90 per cent. The best rates are usually reserved for borrowers with an LTV of 60 per cent or less.
The difference between LTV bands can be significant. A borrower at 60 per cent LTV might be offered a rate that is 0.5 to 1 per cent lower than a borrower at 90 per cent LTV. On a large mortgage, that difference translates into substantial savings over the deal period.
This is one of the reasons why remortgaging can become more attractive over time. As you pay down your mortgage and your property increases in value, your LTV improves, potentially moving you into a lower band with access to better rates.
How to Improve Your LTV
There are two ways to improve your LTV ratio:
- Pay down your mortgage – every payment you make reduces your outstanding balance, which lowers your LTV. Making overpayments, if your deal allows them, can accelerate this process.
- Increase your property value – if your property has risen in value since you last took out a mortgage, your LTV will have improved. Home improvements can also add value, though the increase is not guaranteed.
Even a small improvement in LTV can make a meaningful difference if it moves you across a band threshold. For example, going from 76 per cent to 74 per cent LTV could unlock significantly better rates.
When you remortgage, the lender will arrange a valuation of your property to determine the current LTV. If you believe your property has increased in value, remortgaging is an opportunity to benefit from that growth through a lower interest rate.
LTV and Remortgaging
When you remortgage, your LTV is recalculated based on your current balance and the current property valuation. This is one of the key advantages of remortgaging regularly, as property values tend to rise over time and your balance decreases with each payment.
If you are remortgaging to release equity, however, your LTV will increase. Lenders will assess whether the higher LTV is still within their acceptable range and adjust the rates offered accordingly.
It is worth noting that if property values fall, your LTV could worsen even if you have been making regular payments. In extreme cases, this could result in negative equity, where you owe more than the property is worth. This is relatively rare in the UK but is worth being aware of.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.