Loan-to-value

The loan-to-value (LTV) ratio serves as a metric besides credit scores for lenders towards (first-time) buyers during the mortgage application process or persons remortgaging. It combines the potential borrower's mortgage amount with the appraised value of the property. A higher down payment results in a lower LTV ratio.

To calculate the LTV ratio, first, the existing loan balance has to be determined. Next, this balance has to be divided by the appraised value of the home. Multiply the result by 100 to express the ratio as a percentage:

LTV = (Loan balance/value of property)*100

Many mortgage brokers and providers also offer mortgage calculators/loan-to-value calculators on their websites. These LTV calculators allow the calculation of the LTV ratio in just a few seconds by providing loan balances and house prices.

The loan-to-value ratio is a percentage number. For instance, if a lender presents an LTV mortgage product with a maximum rate of 80%, they are willing to provide a loan amount equivalent to 80% of the property's value. On the other hand, borrowers with a higher LTV ratio (more than 80%) are a higher risk for lenders. Therefore, a high LTV means that they typically have to pay higher interest rates on their mortgage loans and mortgage repayments.

To illustrate, suppose a borrower intends to purchase a property whose purchase price ist €100,000 and can make a 10% deposit. In this case, he would need a mortgage deal with a 90% LTV. Mortgage rates vary depending on the loan-to-value ratio, which typically spans from 50% to 95%.

Typically, borrowers with a low LTV ratio of approximately 80% or under — for example, those that are able to provide a larger deposit or substantial amount of equity — profit from the best mortgage deals. As their LTV ratio decreases, the likelihood of securing a preferred loan with more favourable repayment rates and enhances the chances of lower interest rates increases. They potentially profit from substantial savings on monthly payments.

While achieving this benchmark is ideal, it is only sometimes feasible, especially for first-time buyers who may not have enough in their savings accounts. A smaller deposit or amount of equity, therefore, means that they will have a higher LTV ratio.