‘Loan to value’ (LTV) is a common term in mortgage and secured finance. It refers to the proportion of the value of an asset – usually a property – that has debt secured against it.
Example: A buy-to-let investor owns a rental property worth £250,000. Against the property is an outstanding mortgage of £100,000 and a secured loan of £20,000. The LTV is the combined value of the debt divided by the market value of the property, which in this case is 48%:
(100,000 + 20,000) ÷ 250,000 = 0.48
Many buy-to-let landlords and other property investors use debt to leverage their capital. Loans with higher LTV ratios are riskier, but the potential return on investment is greater.
This is because the up-front costs are lower. The lower the sum invested, the greater the returns in real terms.
The LTV ratio indicates how much equity is in a property. Equity is a safety buffer against falling values. If the LTV of a mortgage goes above 100%, it means that the property is in negative equity: the debt secured against it is greater than its market value. The owner will be unable to refinance or sell without making up the shortfall.
Successful investment is about finding the balance between making the most of your capital and having a safe, sustainable level of debt.
Buy-to-let lenders use LTV as a lending benchmark. Because a lender stands to lose money if a borrower defaults on their mortgage, they impose an LTV limit to reduce the risk of non-repayment.
LTV limits for buy-to-let mortgages tend to be lower than those for owner-occupier loans. Most lenders offer loans up to 75% LTV, with lower rates available up to 60% LTV. The upmost limit is 85% LTV; however, this is only available to experienced landlords.
LTV also affects borrowing limits indirectly. Lenders use affordability calculations to ensure that the rent a property generates can cover the mortgage interest repayments and other expenses. The larger the loan, the larger the repayments, so affordability checks at higher LTVs are naturally tighter.
Use the LTV calculator to see whether you will be able to borrow the required amount.
The LTV calculator is a useful tool for borrowers who wish to increase their borrowing. Enter your current mortgage amount, the amount of equity you wish to release and the market value of your property. The calculator will determine the new LTV amount.
You can also use the LTV calculator to see what effect adding value to your property will have.
You might, for instance, be planning to renovate your property. If you have obtained a post-works valuation and have an idea of how much value you can add, you can see how the project will impact your LTV.
Or you might wish to get a picture of how capital appreciation will affect your LTV. It is never certain how prices will move in the future, but previous trends can give an indication. Based on hypothetical price growth, you can use the LTV calculator to see how your LTV will change over time.
Once you have used the LTV calculator to assess the LTV of your next purchase or remortgage, call us on the number above or click the button below to enquire. Our advisors are on hand to help you find the most suitable buy-to-let loan for your circumstances.
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