When speaking to a mortgage broker you will almost certainly hear the term loan-to-value.
What is loan to value?
Simply put, the loan-to-value or LTV is the ratio of the mortgage balance against the property value. For example a property valued at £100,000 with an outstanding mortgage balance of £50,000 is 50% loan-to-value.
How is loan to value determined?
As far as residential mortgages are concerned, the value of the property is based upon a surveyor’s report, produced on behalf of the mortgage lender. In determining the value of your property a surveyor will research the price for which other similar properties have sold in your locality (comparables).
Please note that a surveyor’s valuation is likely to be different from an estate agent’s ‘valuation’.
What if I’m buying my property cheaply?
In a normal arm’s length transaction, the lender will use the lower of the valuation or the purchase price to determine the value and hence the LTV.
If, on the other hand, it is being sold to you cheaply by a friend or relative, or if it is a council right to buy property, the lender will generally be happy to work on the basis of the market value.
Should you be in this position, please contact us and speak to an adviser who will be able to advise you appropriately.
What’s the deal with LTV anyway?
From a mortgage lender’s perspective, a loan with a lower LTV is lower risk and the interest rate you pay is based upon the bank’s perceived level of risk. At the time of writing, the best mortgage rates are available for loans below 75% loan-to-value. Rates increase significantly for loans between 75%-85% LTV and increase yet again above 85% loan-to-value.