Mortgage Loan-to-Value Facts – A Cap On Borrowing

One of the main factors to consider when taking up a mortgage is the mortgage loan-to-value (LTV).  The LTV figure that a bank provides with any particular deal on offer is the maximum they are willing to lend against the current value of the property.  This value is not negotiable and if it does not suit then an alternative product needs to be found.

The mortgage LTV will be shown as a percentage.  So for example, a couple looking at a house worth £300,000 who are comparing mortgage deals offering a 80% LTV will be able to borrow a maximum of £240,000. However, the couple will still have to prove they can borrow that much, as the LTV is just set against the current value of the property and not against affordability.

The LTV can therefore be very restrictive for first time buyers as 95% deals are few and far between, and the days of 100% or 100%+ mortgages are probably well and truly over. A first time buyer looking at a starter home valued at £185,000 will have to come up with at least £9,250 to break through the 95% mortgage loan-to-value threshold.

Using the above example of being able to borrow 80% LTV means the owners would have 20% equity in the property.  For existing owners who are looking to remortgage a downturn in the housing market can ultimately mean the equity drops, possibly to a point of negative equity making it impossible to either move or remortgage.  As long as the repayments can be made then in the long term the value should improve and the equity increase.

The mortgage loan-to-value set by the lenders for each deal also has an impact on the overall cost of the mortgage. Typically a 70% LTV mortgage will have a more competitive interest rate compared to a 95% LTV mortgage.  Interest only mortgages can therefore be very dangerous if a proper repayment vehicle is not in place, as not only is the mortgage not being paid off but if the market drops the mortgage LTV deals will not allow any kind or remortgaging.

From a lenders point of view a mortgage loan-to-value of 80% or less is going to offer the best risk, so the interest rate will be lower and the deal may be more flexible with potentially lower setup fees.  Personal circumstances restrict but it makes the best sense to aim for the lowest LTV possible, but as always it is best to seek professional advice.