LTV, or loan-to-value, is all about how much mortgage you have in relation to how much your property is worth. It’s normally a percentage figure that reflects the percentage of your property that is mortgaged, and the amount that is yours (the amount you own is usually called your equity).
For example, if you have a mortgage of £150,000 on a house that’s worth £200,000, you have a loan-to-value of 75% – therefore you have £50,000 as equity.
Loan-to-value becomes a key consideration when you come to buy or sell your property, remortgage or release equity.
While your mortgage balance will decrease as you repay it (unless you’re on an interest-only mortgage, where your balance remains the same throughout the term), house prices can do what they like – and this can cause you problems.
LTV is particularly important for newbies looking to take their first steps on the property ladder. As a first-time buyer, you may not have a lot of money to put down as a deposit, meaning the loan-to-value you need may be quite high.
If you owe more on your mortgage than your property is worth, this is known as being in ‘negative equity’.
During the credit crunch many people found themselves in negative equity as they had previously taken out high loan-to-value mortgages (sometimes even exceeding what their property was worth) on the assumption that house prices could only go up, only for them to go down.
Imagine the property of £200,000 again. It has that £150,000 mortgage on it – so 75% loan-to-value – but then something happens: house prices plummet. Suddenly the house that was worth £200,000 is now worth £150,000, which means the loan-to-value is now 100%. If prices fell even more, the borrower would be in negative equity, and would end up having a higher mortgage than the property is worth.
What if they then wanted to remortgage to get a better rate? It could be difficult, if not impossible, to find a new mortgage lender that would offer a loan for 100% loan-to-value (or higher). This means they could end up stuck on an expensive variable rate, with no security against further interest rate rises, paying through the nose for the mortgage.
As you can see, keeping your loan-to-value as low as possible is key – particularly if you’re approaching the point where you need to remortgage. There are two ways you can influence your loan-to-value:
1. Repaying your mortgage
The less of a mortgage you have, the better. If you are on a repayment mortgage you will be reducing your mortgage balance with your payments, and could reduce your LTV in the process. You can even accelerate the repayment of your mortgage by overpaying (providing your mortgage lender allows this and subject to any conditions or limits), which could put you into a lower LTV band quicker and could potentially help you clear the loan sooner. However, if you’ve got an interest-only mortgage, remember that you’re only covering the interest and that the balance stays the same. this leaves you more exposed if house prices go down and your LTV won’t change.
2. Maintaining and increasing the value of your property
By keeping your house ‘in order’ (well decorated, maintained, etc.) you will minimise any loss of value if house prices go down. You can also increase your property’s value by doing home improvements like replacing the windows and doors with uPVC, upgrading the kitchen and bathroom, or even adding things like an en-suite. These could well increase the value of your property and could give you a bigger equity in the process, which could, in turn, help lower your LTV when it’s time to remortgage.
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