“Loan to Value” (LTV) is one of the major factors that every lender uses when assessing applications for loans secured on most types of property. The calculations ratios are predominantly used for first mortgages or second mortgages on residential property, bridging finance and commercial loans.
Loan to Value Risk
The lender always desires as low a LTV as possible as it is a key determinant of risk of default or non payment of the loan. In a nutshell, the lender is generally of the opinion that customers are less likely to miss payments if they have more of their own money (equity) at risk.
The LTV is how much mortgage pound amount you owe in relation to the value of your property. It is normally shown / calculated as a percentage figure.
For example, if you have a mortgage of £100,000 on a house that’s worth £200,000 you have a loan-to-value of 50% – you therefore (in theory), have £100,000 equity. However you would have to sell the property to realise all this equity and don’t forget to take into account any selling costs.
High Loan To Value 75 – 90 LTV
However, if you were to borrow money against a property (releasing some of the equity) the standard figure that lenders are comfortable with (in current financial climate) is up to 75% LTV or three quarters of the property value. The maximum for some second charge loans and mortgage deals is currently 90% LTV but for bridging loan purposes this figure is normally 75%.
What About Bridging Finance Interest Rates?
The Loan to Value figure is also an influencing factor on the interest rate charged. The lower the LTV the lower the interest rate and vice versa. Once again, the rate charged reflects the lenders risk for the loan and is essentially their reward for the loan.
Loan To Value Versus Credit Score
As well as the loan to value percentages, a lender will also consider other factors when making a decision to approve the loan. Credit history is one of those key factors. The lender wants to know your history of repaying credit and any loans you currently or previously have had. Lots of people don’t have a good credit score, but if you have a low Loan to Value your credit score matters less to them as you are still a perceived lower risk.
Very High LTV Values Of 100% Or More
100% LTV is a zero equity situation or if your house has fallen in value you may now be in a negative equity situation. Don’t worry, there is plenty of help. The Money Advice Service may be able to help you. The Money Advice Service is an independent service set up and funded in the main by the government.
They offer free, impartial advice on worrying financial matters and can point you in the right direction, especially if you have additional debts.
They can be contacted on 0300 500 5000 or their website can be found at https://www.moneyadviceservice.org.uk