Loan-to-value ratio explained

If you are thinking about a mortgage or bridging loan, the loan-to-value ratio is one of the most important factors.

Put simply it reflects how much your mortgage (or proposed mortgage) is in percentage terms in relation to the value of the property when taking into account any other mortgages. However, to make the term clearer we can show you a definition and some examples. Let us explain.

Quick explanation: what is a loan-to-value ratio?

A definition

Investopedia defines a loan-to-value ratio (LTV) as:

"A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage."

A higher LTV therefore means that the lender takes on more risk, as it covers more of the funds needed to secure the property. Many lenders have a limit on the LTV that they will accept before they offer a loan. With Affirmative it is 75%.

Let us see how this percentage is calculated.

Examples

It is possible to work out the percentage ratio as:

The loan amount requested (+ any other mortgages)  ÷ the value of the property * 100.

And again, to be clear, the final percentage of the loan-to-value ratio represents the percentage of the property that is covered by the loan / other loans & mortgages. The remainder is the amount that is yours, often referred to as your equity.

Here are two examples:

Example one: Suppose you were to borrow £92,500 for a property worth £100,000. This means the LTV is 92.5%. Therefore you have £7,500 as equity.

Example two: Suppose you have a mortgage of £150,000 on a property worth £200,000. This means the LTV is 75%. Therefore you have £50,000 as equity.

In example one, you may find it difficult to obtain a loan, due to the substantial amount of risk that the lender would have to take on.

However, in example two you would fit within a generally accepted boundary. And in most circumstances you could take out a bridging loan with Affirmative quickly.

How much can I borrow with a bridging loan?

You can borrow £10,000 to £5 million. LTV ratios up to 75%. Interest rates from 1% per month. Free application. Our record is four hours from start to finish.

Find an estimation of your legal costs and valuation fees and call our Manchester office today on 08000 44 84 84 for more information.