Guide

What is loan to value (LTV) and why does it matter?

When you start researching mortgages, you will come across the phrase loan to value, usually shortened to LTV, almost immediately. It appears on comparison sites, in lender criteria, and in conversations with advisers. Yet it is rarely explained in plain terms.

LTV is one of the most important numbers in your mortgage application. It affects which lenders will consider you, what interest rate you will be offered, and how much your mortgage will cost over time. Understanding it clearly puts you in a much stronger position as a buyer.

What does loan to value actually mean?

Loan to value is simply the size of your mortgage expressed as a percentage of the property's value.

Here is a straightforward example. You want to buy a property worth £200,000. You have saved a deposit of £20,000, which means you need to borrow £180,000.

To calculate your LTV: divide the loan amount by the property value, then multiply by 100.

£180,000 divided by £200,000 equals 0.9. Multiply by 100 and you get 90. Your LTV is 90%.

Put another way, your deposit covers 10% of the property's value, and the mortgage covers the other 90%.

Why do lenders care about LTV?

From a lender's perspective, LTV is a measure of risk.

If they lend you £180,000 and something goes wrong (if you lose your job and can no longer make repayments, and the property eventually has to be sold), the lender needs to recover what they are owed. The more equity there is in the property (that is, the larger the gap between the mortgage balance and the property's value), the more cushion the lender has.

At 90% LTV, if property prices fall by even a small amount, the lender's security is already thin. At 60% LTV, the property would need to lose 40% of its value before the lender was at risk of not recovering their money, something that is unlikely in all but the most extreme market conditions.

This is why lenders offer better interest rates to borrowers with lower LTVs. They are taking on less risk, and they pass some of that benefit back to the borrower in the form of a cheaper rate.

How LTV affects your interest rate

Mortgage rates are typically banded by LTV thresholds. The most common tiers are 60%, 75%, 80%, 85%, 90%, and 95%.

The lower your LTV, the better the rate you can access. The difference between tiers might seem modest when you look at a percentage figure, but it compounds significantly over a 25 or 30 year term.

To put this in concrete terms: on a £200,000 mortgage over 25 years, the difference between a rate of 4.2% and 4.7% is roughly £55 per month. Over five years, that is around £3,300. Over the life of the mortgage, the difference is far more substantial.

This is why saving a larger deposit, even by a relatively small amount, can be financially meaningful. Crossing from a 90% LTV to an 85% LTV by adding £10,000 to your deposit could unlock a noticeably better rate and save you more than that £10,000 in interest over time.

The 95% mortgage

For buyers who can only save a 5% deposit, 95% LTV mortgages are available. These are typically the most expensive products on the market in terms of interest rate, because the lender is taking on the most risk.

That said, they are a legitimate route into homeownership for buyers who have the income to support the repayments but have not yet been able to accumulate a larger deposit. There is no shame in using a 95% mortgage: it is a product that exists precisely because not everyone can save 20% of a property's value before buying.

The practical implication is that your monthly payments will be higher than they would be at a lower LTV, and you should factor this into your affordability planning.

Negative equity: why LTV matters beyond the purchase

LTV does not only matter at the point of buying. It continues to be relevant throughout your time as a homeowner.

In the early years of a mortgage, particularly at higher LTVs, there is a risk of falling into negative equity. This is where the outstanding mortgage balance is higher than the current value of the property, which can happen if property prices fall after you buy.

If you are in negative equity, remortgaging is extremely difficult, because most lenders will not offer deals to borrowers whose loan exceeds the value of their security. You can also not sell the property without making up the shortfall from your own funds.

Negative equity is not common in most market conditions, but it is more of a risk at high LTVs, particularly if you buy at or near the top of a rising market. Understanding this does not mean you should not buy with a small deposit, millions of people have done so successfully, but it is worth being aware of.

How LTV changes over time

The good news is that your LTV improves over time, in two ways.

First, your mortgage balance reduces with every monthly repayment. If you are on a repayment mortgage, each payment chips away at the capital, meaning you owe a smaller proportion of the property's value as time goes on.

Second, if your property increases in value, the loan as a percentage of that value also falls. A property you bought for £200,000 that is now worth £240,000, against an outstanding mortgage of £170,000, gives you an LTV of around 71%, considerably better than the 90% you started with.

This improving LTV is one of the reasons remortgaging can be beneficial. When your fixed rate deal ends and you shop for a new one, your LTV may have dropped into a lower tier, unlocking better rates than you had access to when you first bought.

What LTV can you borrow at?

Most high street lenders will consider applications up to 95% LTV for residential purchases, though their criteria for income, credit history, and property type vary significantly.

The 95% LTV space is more competitive than it used to be, with several mainstream lenders offering products in this tier. Government backed schemes have historically helped buyers in this range, though availability and terms change over time; an adviser can tell you what is current.

For buy to let mortgages, lenders typically require a minimum deposit of 25%, meaning a maximum LTV of 75%. The criteria for investment lending are different from residential, and rates reflect the higher risk profile.

If you want to understand what LTV you are likely to be borrowing at and what rates might be available to you, a mortgage adviser can give you a clear picture based on your deposit, your target purchase price, and the current lending landscape.

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This article is for informational purposes only and does not constitute financial advice. Always speak to a qualified mortgage adviser before making decisions about borrowing.