Lenders and banks assess risk before approving a mortgage using the loan-to-value (LTV) ratio. A loan assessment with a high LTV ratio will be considered a more significant risk by lenders and, if a mortgage is approved, it’s likely to come with higher interest rates.
A good loan-to-value (LTV) ratio should typically be no greater than 80%, but many providers cap their lending at 75%. Anything above this threshold will likely result in higher borrowing costs, require private mortgage insurance, or the loan request will be rejected.
How To Calculate Loan-to-Value (LTV) Ratio
Property buyers can calculate LTV using the following formula:
- Mortgage Amount / Appraised Property Value
For example, purchasing a property with an appraised value of £100,000 with a £10,000 down payment (10%) will require the buyer to borrow £90,000. Therefore, the LTV ratio is 90%.
It’s important to note that property owners don’t need to sell a home for the appraisal price. For example, if the appraised value is £100,000 but the seller is willing to sell it for £90,000 and you make a down payment of £10,000, you’ll loan £80,000 from a lender. Therefore, the LTV will be 80%.
Why LTV Is Important
LTV is crucial from both the lender’s and the borrower’s perspective. Lenders use LTV to determine whether an applicant is eligible for a loan. If you have a high LTV of more than 80%, it’s likely the lender will deem your application too high risk and reject your loan request.
But LTV also protects the potential buyer. It ensures you don’t borrow beyond your means and remain financially healthy. So lenders and borrowers alike can use LTV to determine whether the lender is at risk if they agree to loan money to a prospective buyer.
How To Lower Your LTV
An 80% LTV is considered a high ratio. For most lenders, this is too high, usually resulting in the borrower paying higher fees, needing private mortgage insurance, or not getting the loan. If you’re purchasing a property and need to lower your LTV to get approved for a loan, you must make a bigger down payment or negotiate with the seller.
What Are The Cons of LTV?
The most significant disadvantage of LTV ratios is that they only cover a homeowner’s primary mortgage. They don’t account for additional borrower commitments, such as a second mortgage or a home equity loan. As a result, some lenders may look into a Combined LTV (CLTV), as it provides a more comprehensive assessment of a borrower’s capacity to repay a loan.
The differences between LTV and CLTV are covered in the table below:
| Aspect | Loan-to-Value (LTV) | Combined Loan-to-Value (CLTV) |
| Definition | The ratio of the loan amount to appraised property value. | The ratio of total loan amounts (including primary mortgage and additional loans) to appraised property value. |
| Application | Primarily used in mortgage lending to assess risk for a single loan. | Used to determine the overall debt burden on a property when multiple loans are involved. |
| Risk Assessment | Higher LTV indicates higher risk for the lender. | Higher CLTV indicates higher risk due to increased debt on the property. |
Secure The Best Mortgage Deals With Hectocorn
Buyers looking at a high LTV of 75% or above may struggle to gain a loan agreement with many mortgage lenders. However, there are options available regardless of your financial situation if you speak to the right brokers.
Hectocorn’s established relationships with a wide range of mortgage providers enable us to provide you with the best mortgage deals. We can also secure the most favourable terms and advise you on how best to structure the debt on your portfolio to maximise your borrowing power.
Discover how Hectocorn can help you secure a favourable mortgage even if you’re looking at a high LTV ratio by getting in touch[1] .
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