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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.
Q: What does Loan to value mean?
Answer: Loan to value, or LTV, is a financial real estate term, normally expressed as a ratio, used to relate the amount of money you have left on your mortgage compared to the worth, or value, of your property.
Simply put, it’s a measure of the equity you have in your home since the percentage represents how much of your property is still mortgaged versus how much is yours.
Example:
Your house is worth £300,000 and your mortgage is £225,000, which means you have £75,000 of equity. This gives you a 75% LTV ratio.
While the loan to value calculation is important during the buying and selling process, when it’s time to remortgage your property, or if you need to release equity, LTV is especially crucial for first time home buyers.
Since most people wishing to join the property ladder don’t have a large deposit, their loan to value ratio is usually on the high side.
The loan to value ratio is just one of the factors that lenders use during their mortgage application process.
A loan carries more risk for the lender when the LTV ratio is higher, so when you have more equity in your property, the bank will have less of a loss to take if you default.
An LTV of under 80% is considered lower risk and usually these mortgages have lower interest rates.
Lending to a number of lower risk borrowers allows lenders to also consider the prospect of loans for high risk borrowers.
If your LTV is unfavourable, lenders may require you to purchase special mortgage insurance that covers your mortgage in the event you default, while a positive LTV ratios will provide you with better terms.
If you need any help determining what your loan to value ratio is, or how it will impact your property purchase, get in touch with the experts at Dental and Medical Financial services today.