The loan to value (LTV) ratio is simply mortgage funding represented as a percentage of the value of the property it is being used to purchase. The higher the LTV the greater the mortgage funding and the more in interest the client will pay going forward. Since the 2008 US mortgage crisis we have seen a significant tightening of regulations and introduction of a mortgage affordability calculation (based on regular employment income only). As a consequence, the LTV ratio can vary significantly from lender to lender.
Gone are the days of 100% LTV mortgages
In years gone by, mortgage lenders such as Northern Rock were very keen to offer 100% mortgages – i.e. no deposit required. This meant that first-time buyers in particular were able to climb onto the property ladder without saving for a deposit. However, this put both the buyer and the lender at significant risk in the event of a financial crisis and drop in property prices.
Well, in the aftermath of the 2008 US mortgage crisis Northern Rock collapsed with the business model exposed as high risk. In effect Northern Rock was lending money from the money markets, and customer savings, to fund risky mortgages. When liquidity dried up and savings began to dwindle, the company began to struggle for finance and eventually folded.
Simple LTV ratio examples
In simple terms, the higher the LTV ratio the less “headroom” afforded to the lender in the event of a fall in property prices. A relatively low LTV, they can range from 50% up to 80%+, means that for example a first charge of the property (to cover the outstanding mortgage) is significantly covered by the value. If example the property is worth £100,000 and the mortgage was £50,000, it is unlikely that the value of a UK property would half therefore the lender would have significant security.
If it was a 90% LTV mortgage then this would mean a £90,000 mortgage debt on a property valued at £100,000. If the property price was to fall by 20%, down to £80,000, then that would be less than the outstanding mortgage funding. Otherwise known as negative equity!
How to increase your LTV ratio
There are a number of ways in which you may be able to increase the LTV ratio such as:-
• Offering additional assets as security
• Approaching a private bank – they tend to be more flexible
• Including additional income/bonuses in the affordability calculation
It is fair to say that traditional banks are fairly reluctant to increase their risk profile in the mortgage market at this moment in time. Therefore, there tends to be greater room for negotiation with private banks. They are more likely to take into account not only your salaried income but also other income streams from around the world as well as global assets.
In many cases private banks will be looking towards a long-term relationship with often high net worth individuals. An attractive introductory mortgage offer is for many a price worth paying to become more involved in the finances of their high net worth clients going forward. However, this does not mean that private banks take risky gambles – everything is covered in some shape or form.
Risk reward ratio
While many first-time buyers often accuse traditional high street banks of being overcautious, there are reasons. Regulators and banks are concerned that we could potentially see a repeat of the 2008 crisis which brought down the worldwide economy. Even though it is highly unlikely, it is perhaps better to err on the side of caution than to go full steam ahead back towards 100% mortgages.
There may be the opportunity to look towards private banks, often willing to lend on relatively high LTV ratios after taking account of a potential client’s overall financial situation. However, private banks tend to be the domain of high net worth individuals and many are introductory only