When you’re planning to take out a mortgage to buy a property in London, it’s important to understand LTV. Understanding LTV will help you manage your expectations as well as protecting both you and the lender against undue risk.
LTV stands for loan-to-value, and is expressed as a percentage. It is a measure of the risk you pose to a mortgage lender; mortgage lenders will base their decision to lend to you largely on your LTV.
Explaining LTV (loan-to-value)
The easiest way of explaining LTV is with an example. If you hope to buy a property with a value of £400,000, and you have a deposit of £100,000, you will need a mortgage of £300,000. £300,000 is 75% of the value, therefore you own 25% of the equity and the LTV is 75%.
Understanding risk when buying property in London
Since 2008, most lenders are looking for LTVs of less than 80%. Harry Singh, estate agent at Henry Wiltshire Hayes, explains more.
“The part played by unrealistic mortgages in the financial crisis of 2008 is well known. Banks lent too much money, leaving homeowners unable to pay back what they owed. Some lenders had loaned more than the value of the property, sometimes up to 125%, and were unable to recoup the loan even through repossession. Mortgage lenders learnt from this, and we now live in a more conservative financial climate as a result. A positive from this is that borrowers are under less financial pressure and run less risk of repossession. Banks are also more likely to receive the repayments, enabling them to carry on lending.”
In general, mortgage providers are more likely to lend money for a house purchase where there is a low LTV (less than 80%). The higher your LTV, the higher the risk you pose for the lender. For this reason, mortgages for purchases where there is a high LTV (e.g. 90%) usually carry higher interest rates.
Fortunately, by shopping around, homebuyers with small deposits can still find affordable rates – it is well worth visiting a number of different lenders before making a decision.
Buy to Let mortgages
The government has recently made changes to Buy to Let mortgages, making them harder to secure but also protecting lenders against risk and borrowers against repossession.
When approaching a lender for a BTL mortgage, it is important to bear in mind that most BTL mortgages demand an even lower LTV than for residential mortgages, with many landlords unable to secure mortgages of over 80%. Again, shopping around can help you find the right financial product for your needs, and savvy investors are leaving no stone unturned.
Buy and sell property in Hayes
Harry and his team of estate agents at Henry Wiltshire Hayes are experts in the West London property market. To find out more about buying and selling property in UB3, contact the team today on 020 3696 5626.