When it comes to mortgages, there are a lot of different areas to think about. But one that might have slipped through the net is your Loan to Value (LTV) ratio. It’s something that can have an impact on the amount of interest you pay over the term of your mortgage. As a result, understanding your LTV could save you money.
What is an LTV rate?
Your LTV ratio is used to show how much of the property you own compared to the loan you’re taking out. The lower the LTV, the more equity you own in the property.
It’s simple to work out: Take the amount you’re borrowing through a mortgage and divide this figure by the total amount you’re paying for the property. Then multiply this answer by 100.
For example, if you want to purchase a house with a value of £500,000 and have a deposit of £50,000, you would calculate:
450,000/500,000 = 0.9
0.9X100 = 90
As a result, the LTV ratio is 90%. This means that you own 10% of the property, with the loan covering the remaining 90%.
Why does this affect what you will pay in interest? The lower the LTV ratio, the less risk you represent to the lender. As such, the most competitive interest rates are offered to those that have a lower LTV ratio.
Higher LTV mortgages are often more desirable for first-time buyers who have little capital to put down as a deposit. As you gain more equity in your home and become more financially stable, LTV rates will usually fall. Of course, you can choose to increase your LTV again, for instance, when you step up the property ladder or to release capital to renovate your home.
Steps to take to secure a better mortgage rate
With your LTV rate playing a role in the interest rates offered, a lower ratio can save you money, whether you’re moving home or remortgaging. There are some steps you can take to lower your LTV ratio:
- Look at properties with a lower asking price
The simplest way to increase your LTV ratio when you’re moving is to look at properties with a lower asking price. It means your deposit will give you a greater stake in your home from the outset, instantly lowering your LTV ratio. LTV bands are usually at 10% increments, with the best rates available for those that own 40% or more of their home, so this is something to keep in mind when searching for a property.
- Increase your deposit
Increasing your deposit is also a relatively straightforward step. If you’re purchasing your first home, it can be wise to save for an extra few months to reach a lower LTV band. If you’re moving from a current property, the deposit you can put down is likely linked to the sale price of your own home but you can also choose to use additional capital to boost your equity.
- Get an up to date valuation of your property
LTV rates aren’t just important when moving, they’ll have an effect when remortgaging too. Before you approach lenders, make sure you get an up to date value for your home. The recent trend has seen property prices rise and, as your loan will have remained the same, this could mean your equity has grown without you realising it. It’s a simple step that could shave hundreds of pounds a year off your repayments.
- Increase the value of your property
Whether you’re selling or remortgaging, increasing the value of your property can help you access lower interest rates. Some tasks can be quick and easy to complete, such as giving tired rooms a fresh lick of paint. Others may require an investment but when you look into the value it could add, it may be worth it. For large renovation projects, showing the potential of your property can work too, such as obtaining planning permission for an extension.
- Overpay your existing mortgage where possible
If you’re already paying a mortgage, overpaying where possible can help increase the equity you own far more rapidly. When you’re making your standard mortgage payments, it’s likely a significant portion is paying off interest, particularly if your LTV is higher. In contrast, the amount you overpay will come off your loan. Be aware though, some mortgage products may charge you for making overpayments or only allow you to make overpayments without a fee up to a certain point.
If you’d like to discuss what LTV rates mean for you and how they will affect the interest rates you’re likely to pay, please contact us. We’re here to help you find the best mortgage deal for you, whatever LTV band you fall into.