Loan to Value Calculation: What It Is and How To Calculate It

When you are searching for a buy-to-let mortgage, there are many variables that can affect the deals you are offered, and if you are accepted. One of the key factors in a lender's decision is the loan to value ratio.

Understanding what a mortgage LTV is, the loan to value calculation itself, its importance to mortgage lenders, and how potentially it can be improved are all-important to savvy property investors looking for the most competitive btl mortgage deals.

All these questions are answered in this detailed guide to the loan to value calculation.

Contents

How To Calculate A Mortgage LTV

The Mortgage LTV is worked out by dividing the value of the BTL mortgage you need by the mortgage valuation of the property.  This is commonly known as the LTV calculation (loan to value calculation).

LTV calculation (LTV ratio%) = Mortgage Amount / Mortgage Valuation

Lets look at an example. The property investment is valued at £100,000. The buy to let mortgage is £75,000. That means the loan to value ratio is 75% and the property investor is expecting to put £25,000 of equity into the deal.

Refurbishment costs, stamp duty and legal fees are NOT included the LTV calculation.

Now, lets look at an example where the mortgage valuation is less than purchase price. This is known as a down valuation. In the LTV calculator below you can add your own values and calculate the required deposit.

LOAN TO VALUE CALCULATOR
DESCRIPTIONAMOUNT
Purchase price £
Mortgage valuation £
Mortgage amount offered £
Loan To Value (based on mortgage offer)
Deposit required (based on mortgage offer)

Copyright: Property Investor Academy

Use Of This Calculator
1. This calculator does not constitute mortgage advice. Rather, it seeks to explain how the UK mortgage market currently operates.

Understanding The Loan To Value Ratio

Now that the LTV calculation has been completed, lets understand the results.

Mortgage LTV is an important commercial consideration for BTL investors. It affects the interest rate you will pay. That's why it's important to understand and calculate the mortgage LTV before beginning your search for a buy to let mortgage.

From a mortgage lenders perspective, the LTV ratio is a simple metric which indicates the level of risk associated with a loan.  The higher the ratio, the greater the risk. By way of example, a LTV ratio of 100% indicates an high risk loan.  Conversely, a loan to value ratio of 50% is much less risky as the proceeds from any forced property sale should comfortably clear the outstanding loan plus expenses.

From a borrowers perspective, understanding the loan to value ratio can be summed up in one simple sentence - the lower the better!  Keeping your mortgage LTV low by paying a bigger deposit means you can enjoy better mortgage deals, the mortgage interest rate will be lower, and in the end, you will pay less overall than someone with a high loan to value ratio.

How Is the Loan to Value Ratio Used By Mortgage Lenders?

When a property investor requires a BTL mortgage, the mortgage lender will require a mortgage valuation from an expert.  The mortgage valuation report informs the mortgage lender of the current value of the property, in a professional and independent manner.  Furthermore, the report may identify significant issues which might affect its value as security for the mortgage.   

Once the valuation has been received, the lender can perform the LTV calculation as follows:

LTV calculation (LTV ratio%) = Mortgage Amount / Mortgage Valuation

Nearly all mortgage lenders use the loan to value ratio when setting their mortgage rates. The lower the LTV ratio, the lower the interest rate charged will usually be.

The reason the mortgage LTV is used in this way is that a low loan to value ratio means there is more equity in the property. If house prices fall, there is a significant risk that the property value will drop to less than the mortgage amount.  That’s really important to lenders because if they have to sell the property to recover the mortgage loan it could mean they can't recover the full debt. The house value needs to remain above the mortgage value for the lender to be certain of making a full recovery.

For example, if the LTV ratio is 75%, there must be a 25% drop in house prices before the lender is at risk of losing money. Therefore, mortgage rates get better the lower the LTV ratio is, as the risk for the lender is significantly less.

Buy To Let Mortgages: What Does The Loan To Value Ratio Really Mean

Lenders use a range of factors to decide how risky you are. Your income, credit score, and ability to pay are all considered. The other big consideration is the LTV ratio - the LTV ratio also has a significant impact on the deals you will be offered.

In the context of a BTL mortgage, the maximum LTV ratio currently is 75%.  This means that UK lenders are requiring property investors to inject equity of at least 25% into their investment.

What's A Good Loan To Value Ratio For A Buy To Let Mortgage?

There is no ideal LTV ratio when getting a buy-to-let mortgage. Lenders vary their interest rates based on their own decisions about your mortgage application.

However, as a rule of thumb you should always aim for the lowest LTV ratio you can afford. A 70% ratio means the lender's risk is much less.  Property investors will start seeing even better deals than those with an LTV of 65% or less.

Remember, lenders are concerned about suffering a loss. They will sell the house in a worst-case scenario which means a high LTV could be riskier for them (as there is less equity) if house prices drop.

What Happens if Property Prices Drop?

The loan to value ratio is important throughout the entire period of ownership, whether an investor is purchasing a property, remortgaging, or releasing equity.

If your BTL mortgage is interest only, then any payments you make are only covering the interest. The amount you owe for the property doesn't change – meaning your LTV ratio won't reduce. If there is a price drop you are exposed to the risk that the property value is less than the mortgage.

BTL mortgages are normally offered on attractive deals which last for between 1 and 5 years. Your latest mortgage deal may come to an end.  Unless you are able to remortgage to a different lender, there is a risk that you may need to pay a significantly increased interest rate once the deal expires. The ability to remortgage will be significantly influenced by the current LTV calculation.

Improving Your Loan To Value Ratio

Getting your LTV ratio as low as you can is recommended. There are several ways you can improve your LTV ratio.

Before purchasing a property investment the best way to get a lower LTV ratio is to pay a higher deposit. The more you can pay up front, the lower the LTV calculation will be, and the better mortgage rates you will be offered.  It may be worth selling other assets (eg shares, bonds) to increase the size of the deposit.

Overpaying your mortgage means every overpayment you make reduces the balance you owe. The less you owe, the less your mortgage LTV becomes. If you take out a repayment mortgage, then you could overpay and reduce the balance quicker which will reduce the LTV ratio. However, not all lenders allow you to overpay - make sure to check the terms and conditions of your mortgage to see if you can overpay.

Increases in the property value will reduce the LTV ratio. Some ways to increase the property value include making home improvements such as a new kitchen, undertaking a loft conversion, or adding an en-suite bathroom. All these alterations and more could increase the property value. The higher the property value, the more equity you hold, and the lower the LTV calculation will become.

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Peter D Doherty

Peter D Doherty is the founder of the Property Investor Academy.

A Masters graduate in accounting and finance from Dublin City University, Pete worked in the City of London for 14 years. He held senior finance roles (Financial Controller) in several substantial UK commercial banks. He is a graduate of Macquarie University.

With over 10 years property investing experience, he is the owner of a London based lettings agency as well as proptech consultancy. He regularly contributes to online landlord forums such as Propertytribes and Reddit.  Peter is a member of National Residential Landlords Association (“NRLA”).

https://uk.linkedin.com/in/peter-doherty-tal
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