LTV, or loan-to-value, refers to how much your mortgage borrowing is related to how much your property is worth. It’s a percentage figure that shows the proportion of your property that is mortgaged, and the amount that is yours.
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%, hence you have £100,000 as equity.
Loan-to-value becomes a key contemplation when you come to purchase or sell your property, or release equity.
How LTV affects your mortgage
While your mortgage balance will reduce as you repay it (except you’re on an interest-only mortgage, where your balance remains the same during the term), property prices, can and do, rise and fall, and this can cause you some inconveniences.
LTV is extremely crucial for first time buyers looking to take their first steps on the property world. As a first-time buyer, you may not have lots of money to put in a deposit, and this means that the loan-to-value you need may be very elevated.
If you are indebted more on your mortgage than your property’s worth, this is known as being in ‘negative equity’.
In the course of the credit crunch, lots of UK citizens found themselves in negative equity because they had previously taken high LTV Mortgages (sometimes even transcending what their house was worth) on the speculation that house prices could only increase, only for them to go down.
Imagine our house of £200,000 again. It has that £100,000 mortgage on it, so 50% loan-to-value, but then something takes place: house prices plummet. Immediately the house that was worth £200,000 is now worth £100,000, which means the loan-to-value is now 100%. If prices fell even more, for example £140,000, the debtor would find himself in negative equity. This would mean that they have a higher mortgage than the property’s value.
What if they then wanted to remortgage to get a better price? It could be almost impossible to find a new mortgage lender that would present a loan for 100% loan-to-value. This means they could conclude stuck on a high-priced variable rate, with no security against future interest rate rises, paying through the nose for the mortgage.
How to Influence Your LTV
As you can see, maintaining your loan-to-value as low as possible is crucial, especially if you’re coming to the point where you need to remortgage. There are two manners you can dominate your loan-to-value:
Repaying your Mortgage
The lower mortgage you have, the better. If you are on a repayment mortgage you will be decreasing your mortgage balance with your payments, and could reduce your LTV ongoing. You can even rush the repayment of your mortgage by over-remunerate, which could place you into a lower LTV faster and could potentially help you free the loan in a short period. Nevertheless, if you’ve got an interest-only mortgage, don’t forget that you’re only covering the interest and that the balance stays equal. This leaves you more unconver if the property prices go down and your LTV remains the same.
Maintaining and Increasing the Value of your House
By keeping your house well maintained you will decrease any drop of value if property prices go down. You can even raise your property’s value by doing home improvements like collocating new windows and doors with, remodelling the kitchen or bathroom and adding extra things like a modern wardrobe. These may well raise the value of your house and give you more equity in the meantime. This could help lower your LTV when you need to remortgage.
In case you are looking for Below the Market Value Properties, there are a lot of PropTech software where you can find them. One of the best-known is DealSourcing. This PropTech Software has been able to automate this process and create a platform that becomes your very own property sourcer. Through algorithms and the power of automation, the platform is able to find properties from all across the internet and sort them by ROI.
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The software also calculates the return on investment for every property on Rightmove and locates below market value properties for sale, saving investors hours of time spent on research.
The Top 3 Most Useful Use Cases of DealSourcing.co:
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They’ve analysed the data of nearly 500,000 properties across England, Scotland and Wales. Their primary mission is to find the highest buy-to-let yield for each postcode.
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Property is in negative equity if it’s worth less than the mortgage secured on it. They help you find those deals by geographic location.