For buy to let investors, an LTV calculator can be an invaluable tool to check the ratio between the value of their property and the debt secured against it.
Calculating LTV for buy to let mortgages
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.
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LTV affects how much you can borrow
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. It is possible to borrow up to 85% LTV, or more, if another property is used as additional security.
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.
A guide to LTV thresholds
- 85%: Generally the uppermost limit for buy to let mortgages, however, you may be able to borrow more if you have other property with equity that you can borrow against. Affordability may restrict borrowing at this level.
- 80%: More buy to let lenders will consider granting loans up to 80% LTV, though those that do are typically specialist firms. Affordability may restrict borrowing at this level.
- 75%: The majority of buy to let lenders, including mainstream firms, will grant loans up to 75% LTV. Affordability is less likely to restrict borrowing at this level, though local prices and rents will still be a factor.
- 60%: Lenders tend to restrict their best offers to LTVs of 60% and below. Affordability is unlikely to restrict borrowing at this level due to the lower loan amount and cheaper interest repayments.
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.
Use the LTV calculator to assess the impact of adding value
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.