Getting a mortgage can be challenging, but not impossible. Financial planning is essential and stability takes time to achieve. The most difficult part? The actual deposit. Whether or not you discuss with a broker, you will see all kinds of terms you are not familiar with. When checking deposit requirements, you will often run into the LTV term. What does it mean?
Understanding the concept of LTV
The LTV is a common figure among lenders. Its main role is to indicate the deposit requirements when you analyse tables and offers. LTV is basically short for Loan To Value, which refers to the amounts of money you need for the house. It tells you how much of the property you need to borrow. For instance, if the property is worth £100,000 and your deposit is £20,000, you bring in a 20% deposit. At this point, you owe 80% – this is the LTV.
Why do lenders use this proportion, rather than actual numbers or the deposit size? They think about it in advance. Many homeowners tend to remortgage later on. They change the deal and aim for something better. Once you already have the mortgage, you do not have to worry about the deposit again. Instead, it all related to how much of the property you want to borrow. At this point, discussing LTV ratios is much easier.
The importance of LTV
To an average homeowner, the LTV may not provide too many details – just a way to discuss the deposit the other way around. However, it is totally worth considering this value. At the end of the day, it does not refer to how much money you put into the actual property only. Instead, it is also affected by house prices. This aspect is extremely important. See it this way – you buy a property, so you put your money in an asset that fluctuates.
Here is a practical example. You come up with a £20,000 deposit for a £200,000 house. You owe £180,000 – the LTV ratio is 90%. Years later, you owe £170,000 after paying some of it. You want to remortgage and the house value has not changed over these past years, meaning your LTV is 85%.
What happens if the house gains in value? Even better. The house is worth £240,000 now, so your LTV is around 70%. What does it mean? You will be able to find much better deals and interest rates. Obviously, this is not always the case. A growth might be lower than that, yet certain factors can seriously boost it.
Then, you have the negative aspect of a remortgage deal too. If the house value drops to £160,000, you owe more than what it is worth. Lenders will invest in an asset that can help them recover their money should you find yourself unable to pay. Having negative equity will not give you too many options, so finding a remortgage deal may not work.
When planning everything, you need to get ready for unexpected situations too. You find a house and you agree on the price. You apply for the mortgage, so the lender will also try to evaluate it to decide whether or not it is worth the money. If it is not, the lender will only give you a certain amount of money, meaning you might need to start all over again. You might have to find a different house – better priced – or save more money for the deposit.
Bottom line, the LTV is extremely important in the long run – not necessarily in the beginning, but as you seek better deals after a few years.