If you're interested in finances, you can take a look at our partially amortized load calculator. Otherwise, keep reading to learn how to calculate the Loan to Value ratio!
What is Loan to Value Ratio?
Imagine that you want to buy a house. You can't afford it, though, unless you take a mortgage - the property costs $200,000. You have analyzed your finances and decided that you have $20,000 available for the down payment.
LTV describes what is the ratio between the loan amount and the total purchase price. It means that, in this case, you will have to follow the steps below.
- Subtract the down payment from the total price to obtain the loan amount:
$200,000 - $20,000 = $180,000
- Divide the loan by the total price:
$180,000 / $200,000 = 0.90
- Finally, multiply this value by 100% to obtain LTV:
LTV = 0.90 * 100% = 90%
How to calculate Loan to Value?
This LTV calculator uses two simple formulas to determine the LTV of a transaction. You can use it in multiple ways - for example, you can input the LTV and total price of the property, and let this tool figure out the other two values.
The two equations are:
purchase price = down payment + loan
Intuitively, the total purchase price is the sum of the down payment (the sum of money you are able to pay from your account) and the loan that the bank lends to you.
LTV = loan / purchase price * 100%
As mentioned earlier, this LTV calculator defines the Loan to Value ratio as the loan divided by the purchase price, expressed as a percentage.
What’s a good LTV for a mortgage?
The lower your LTV, the wider your choice of mortgages will be.
Lenders usually offer their most competitive mortgage deals to borrowers they consider lower risk, which means homebuyers with a big deposit to put down, or those who own a substantial amount of equity in their property if remortgaging to a new deal.
If therefore, you qualify for a 50% LTV mortgage because you have a 50% deposit or the equivalent amount of equity if remortgaging, you’ll benefit from better rates and greater choice than someone with a smaller deposit or equity.
Similarly, if your LTV is 60% you’ll usually have a wide range of competitive deals to choose from, as lenders will still consider you less likely to default on your mortgage than someone with a smaller deposit or equity.
If your LTV is 75% you’re also likely to qualify for a wide range of deals at lower rates than you’d be offered with a higher LTV. If you have additional savings available, it therefore may be worth considering using these to reduce your mortgage amount, as this could ultimately get you a better mortgage deal and save you money in the long run. Always make sure you keep some savings available that you can use in the event of an emergency.
High LTV mortgages – 90% & 95% LTV Mortgages
If you only have a small deposit to put down, such as 5% or 10% of the property value, you will be restricted to 95% or 90% LTV mortgage deals.
The good news is that recent years have seen increasing numbers of lenders launch high LTV deals, although the rates offered will be higher compared to lower LTV mortgages.
Prior to the 2008 financial crisis, some lenders used to offer 100% LTV mortgages, where you didn’t need to put down a deposit at all, but these are now considered too high risk. Some even offered 125% LTV deals, where you could borrow more than the property’s value, but again, these are no longer available.
LTVs on buy to let mortgages
If you want to buy a property to let out and need a mortgage, you’ll usually find LTVs on buy to let mortgages are generally a bit lower than they are on residential mortgages, as they represent a higher risk to lenders.
The maximum amount you’re likely to be able to borrow is 75% to 80% of the property value. Bear in mind too that buy-to-let mortgage rates will usually be higher than residential rates.