LTV or Loan-to-Value is a ratio of the size of your loan compared to the value of the property you want to buy, and expressed as a percentage.
You can calculate the LTV by dividing the amount you’ll need to borrow to purchase a property by the property’s value and multiplying that number by 100.
For example, if you're buying a house for £250,000 and you're borrowing £200,000 then your LTV will be 80%.
This means that you'll have a mortgage for 80% of the property value, while the remaining 20% will be paid for with the money you saved as a deposit.
You can also use an online LTV calculator to find out your LTV.
The LTV matters because is plays a vital role in determining what mortgage you'll get and how much it costs.
Typically, the higher your LTV, the riskier it is for the lender to offer you a mortgage. This is because a higher LTV means you are borrowing more of the property's value and have less equity in your home, which makes you more likely to default on your mortgage.
If you defaulted on your mortgage, and the value of the property fell below what you paid for it, the lender would lose money on the sale.
This is why high LTV mortgages generally don't offer the best interest rates and can charge higher fees.
As with most financial products, there is not one ideal LTV number for everyone. That said, most lenders recommend an LTV of 80% or below, however the best rates are offer to LTVs around 60%. This means that you would need to have a deposit that covers around 40% of the property value.
The simplest way to make sure you don't have a high LTV is to save for as large a deposit as you can. This could mean that you might have to wait a littler longer before you can buy your first home. Another way is to choose a cheaper property. With a cheaper property you won't have to borrow as much and you can save up for a decent sized deposit sooner.
As mentioned earlier most lenders recommend having an LTV of 80% or below. You can use that benchmark, along with the deposit you have save to calculate the maximum budget for your property.
For example, let's assume you have a deposit of £25,000 saved up to go towards your deposit. The maximum LTV you want to have for your mortgage is 80%. This means that 20% of your property value will be paid for by your deposit, which is one-fifth of the property value.
To calculate an 80% LTV ratio, you can multiply your deposit amount by 5 which works out to be (£25,000 x 5 ) a maximum budget of £125,000. If you want to purchase a property that's higher than that amount, you'll have to wait and save up a larger deposit.
Find out more about how to save up for a mortgage deposit
It's important to be aware that just because your LTV is within recommended bounds does not mean that you'll automatically be accepted for a mortgage. Lenders consider several other variables about your finances when assessing a mortgage application.
While you can technically get mortgage with no deposit, but not lender will offer you one with a guarantor. Guarantor mortgages can allow you to borrow 100% of the property’s value, but requires risking someone else’s home in the process. You'll have to be absolutely sure you can afford to make the monthly repayments.
You can also read our guide on getting a mortgage with no deposit
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.