When you begin your house hunting journey, you might find yourself confused about all the new terminology you need to know. One such term — loan to value (LTV) ratio is how much of a loan you’ll need compared to the value of the property. It’s one of the factors a lender takes into consideration when deciding if they’ll accept your mortgage application.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
In general, the lower the LTV, the better. Whether you’re buying your first home or remortgaging, your LTV will directly affect the amount of equity — the portion of your property’s value that isn’t wrapped up in debt — in your property. A healthy amount of equity can be used to combat possible future financial hardship, so it’s always a good idea to work toward having equity in your home, starting with a low LTV right at the start.
It’s relatively easy to calculate your LTV. Take the amount of mortgage you need and divide it by the purchase price, the percentage you end up with is your LTV, and the remaining portion is the amount of equity you have.
For example, the purchase price is £350,000 and you need a mortgage of £325,500. Following the calculations, your LTV would be 93%, leaving you with 7% equity. If you don’t have enough equity in your home and the value decreases over time, or during a particularly rough period in the market, you might end up falling into negative equity, where you end up owing more to your mortgage provider than the home is actually worth.
So, it’s best to try to keep your LTV as low as possible. One way to do this is to have a significant deposit that makes a dent in the purchase price. You can also wait until your home’s value increases and cash in by refinancing your mortgage.
Saving for a higher deposit
Obviously, the more you can put toward a deposit, the smaller your mortgage will be and more options will be available to you with lower interest rates. Your monthly repayments will be lower as well and you’ll generally be more attractive to lenders.
Overpaying your mortgage
Overpaying your mortgage will help lower your LTV ratio along with saving you money on interest and possibly help you pay off your mortgage sooner than anticipated. This is a great strategy to build your equity if you want to remortgage eventually. As you know, the more equity you have in your home, the better deal you’ll be able to get. It will also provide a bigger cushion should you ever need to tap into your equity for an emergency.
In order to get the best deal on your loan, it’s important to understand how LTV works when you’re considering taking out a mortgage.
Is it time to discuss your mortgage needs?
If you’re ready to find and apply for the right mortgage, whether you’re hoping to get on the property ladder or move up it, your search starts here. To discuss your options, contact Dental & Medical Financial Services today.