Loan to Value

Loan to Value or LTV is a ratio that describes the relationship between loan amount and the value of a property. This ratio is calculated by dividing the loan amount by either the sale price or the property’s appraisal value.

LTV is one of several factors lenders use to decide whether or not to approve a mortgage or remortgage. LTV is always referred to as a percentage. When the amount of lent money is higher versus the down payment amount, the mortgage is said to have a high LTV. For example, a loan of £75,000 on a £100,000 home has an LTV of 75 per cent.

Lenders see loans with a high LTV as riskier than those which borrowers have a higher down payment to offer or have larger equity amounts. From the lender’s side, a borrower with little invested has less to lose if they default on the loan compared to someone who has given a bigger down payment. It is not uncommon for lenders to require borrowers to obtain mortgage insurance, to help protect the interests of the lender. This insurance increases the total cost of the mortgage.

High LTV loans usually carry high interest rates with them. Also, more often than not high LTV loans will be harder to qualify for.

Another important component of a mortgage or remortgage loan is the appraisal. With a high LTV loan, the appraisal is very important because it can put the whole negotiation at risk. For example, if a buyer is looking at a £300,000 home and has 5 per cent to put down on it, they need a loan of £285,000. If a lender will provide 95 per cent of the appraised value and the appraisal comes in at £290,000, the amount of the loan would be just £275,500. That is £9,500 lower than the borrower needed to close on the property.

LTV is an important in assessing the possibility of a mortgage to work out or not. A good rule of thumb is to always be ready to contact a mortgage broker. This will likely work out in your favor if the appraisal does not come back as planned and you need an alternate loan source.

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