First and foremost, Loan to Value (LTV) is the size of your mortgage in relation to the value of the property you want to purchase and is given as a percentage.
The easiest way to figure this out for yourself is to divide your mortgage amount by the value of the property and multiply that number by 100. For instance, if you have a bought a property with the value of £300,000 and your mortgage amount is £240,000, your Loan to Value would be 80%. £240,000 / £300,000 = 0.8 0.80 x 100 = 80 Therefore, your LTV is 80%, resulting in your deposit being 20% (£60,000). This can also be viewed as the equity in the property.
Loan to Value plays a prominent role in a the purchasing of any property. Lenders use this facility to make a decision about approving your mortgage or not. The higher the LTV, the riskier it is for the lender to approve your mortgage. It’s especially important to grasp if you are buying a property with the intention of renting it out. The Loan to Value amount in Buy to Let mortgages are particularly important because they can help to determine the monthly payments needed to cover the cost of your mortgage repayments. With a Buy to Let mortgage, the mortgage provider will look at the expected rental income, and they usually expect the annual rental income to equal 125% of the annual mortgage interest payments. Again, for example, if you are paying mortgage interest rates amounting to £20,000 a year, you’d be looking for a rental income of about £25,000 or more. Due to the fact that the margins are so tight, lenders impose strict conditions to reflect the greater risk of Buy to Let mortgages. There’s always the danger of tenants falling behind with payments or lapses of time between new tenants moving in and old ones moving out, which can pose problems.
There are a few key scenarios in which Loan to Value plays a decisive role for both lenders and borrowers. Firstly, the higher your Loan to Value is, the greater risk you are to a lender, therefore you become less likely to secure a mortgage. From a lender’s perspective, the less equity you have in your home, the more likely you are to come into financial difficulties. On top of that, if your house was repossessed, (due to failure to keep up with repayments), the lender is more likely to make a loss, if the property was sold. Secondly, the housing market is rather unpredictable. This means that if house prices were to suddenly plummet, so much so that the value of the property fell be what you originally paid for it, the mortgage could end up being more than the property's value. This bad news for you as you would be in negative equity, and bad news for the lender as they would lose out too.
In the simplest of ways, the higher your LTV (meaning the smaller your deposit), the fewer rates and lenders you will have to choose from. Whereas, the greater your deposit and the lower your LTV, the more options you will have, in terms of lenders and rates. To maximise your chances of securing the best deal, the best mortgage rates are favoured towards those with an LTV of closer to 60%, which means deposits of 40%.
The best way to keep your LTV down is to save the biggest deposit you can. Granted, this may delay your first step onto the ladder or securing the mortgage product you desire but it will leave you in a much stronger position, with more options and better rates. Another, more obvious, option is to look at properties with lower values or asking prices. This, in turn, will naturally reduce the size of your mortgage.
The dedicated and experienced team at MortgageKey have a great understanding of Buy to Let mortgage products, and even better relationships with likely lenders. By utilising our free, friendly advice and obtaining a no obligation quote, you could be one step closer to securing a great mortgage rate. Contact one of our advisors today for more information about Loan to Value for Buy to Let mortgages.
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