When it comes to securing a mortgage, the Loan-to-Value (LTV) ratio is a crucial factor that influences the interest rates and the types of mortgage products available to borrowers. This article will delve into how LTV impacts mortgage rates, explain why mortgage products are often rounded up, and outline the different LTV ranges commonly offered by lenders.
What is LTV?
The Loan to Value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In the context of mortgages, it is the ratio of the loan amount to the appraised value of the property. It is calculated using the following formula:
For example, if you want to buy a house valued at £200,000 and you have a £20,000 deposit, you need a loan of £180,000. Your LTV ratio would be:
How LTV Impacts Mortgage Rates
LTV ratios significantly impact mortgage rates because they indicate the level of risk a lender is taking. A higher LTV means a higher loan amount relative to the property value, which translates to higher risk for the lender. Conversely, a lower LTV indicates a lower risk. Here’s how this affects mortgage rates:
- Higher LTV, Higher Rates: If the LTV is high (e.g., 90% or above), lenders view this as a riskier loan because the borrower has less equity in the property. To compensate for this increased risk, lenders typically charge higher interest rates.
- Lower LTV, Lower Rates: Conversely, if the LTV is low (e.g., 60% or below), the borrower has more equity in the property, which means less risk for the lender. This usually results in lower interest rates.
Rounding Up of Mortgage Products
Mortgage products are often offered in rounded LTV increments (e.g., 90%, 85%, 80%, 75%, etc.) rather than exact percentages matching a borrower’s deposit. This is due to several reasons:
- Standardisation: Lenders prefer standard LTV bands to simplify the product offerings and make it easier for borrowers to understand their options.
- Risk Assessment: Standard LTV ranges help lenders more easily assess and manage risk. They set specific criteria for each LTV band, which aids in the underwriting process.
- Marketing and Competition: Lenders compete within these common LTV bands, making it easier to compare products across different financial institutions.
For instance, if you have a 12% deposit, you might assume you should get an 88% mortgage. However, mortgage products are typically rounded to the nearest standard LTV band. In this case, you would likely be offered a 90% LTV product because 88% does not fall within a standard LTV band.
Common LTV Ranges
Lenders typically offer mortgage products within certain LTV ranges. These ranges can vary slightly between lenders, but generally, the most common LTV ranges include:
- 90% LTV: For borrowers with a 10% deposit.
- 85% LTV: For borrowers with a 15% deposit.
- 80% LTV: For borrowers with a 20% deposit.
- 75% LTV: For borrowers with a 25% deposit.
- 70% LTV: For borrowers with a 30% deposit.
- 60% LTV: For borrowers with a 40% deposit.
- 50% LTV: For borrowers with a 50% deposit.
Some lenders might offer additional ranges such as 95% LTV for those with only a 5% deposit or even lower ranges for high-net-worth individuals or special circumstances. However, the above ranges are the most commonly available and advertised.
Conclusion
Understanding the LTV ratio and its impact on mortgage rates is essential for any prospective homebuyer. Higher LTV ratios typically result in higher mortgage rates due to the increased risk to the lender, while lower LTV ratios can secure more favourable rates. Additionally, the mortgage products are often rounded to standard LTV bands to streamline offerings and risk assessments. By being aware of the common LTV ranges, borrowers can better plan their finances and make informed decisions when applying for a mortgage.
