What is loan to value and why does it matter for property investors?

Understanding loan to value (LTV) is crucial in property investment. It directly affects how much you can borrow and the terms of your loan. In this blog, we’ll explore what LTV is and why it’s so important for property investors.

What is loan to value?

Loan to value or LTV, is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In property investment, LTV represents the proportion of the property's value that you're borrowing. It's typically expressed as a percentage and provides lenders with a quick assessment of the risk associated with offering you a mortgage.

A lower LTV indicates you're borrowing less relative to the property's value, which generally suggests reduced risk for the lender as you have more equity in the property. Conversely, a higher LTV implies increased risk, as you're borrowing a larger portion of the property's value. LTV is a crucial factor in determining your mortgage eligibility and terms, often influencing interest rates and other loan conditions.

How does loan to value affect property investment?

The impact of LTV on your property investment is multifaceted. A lower LTV might limit the number of properties you can invest in simultaneously, but it also reduces your risk. Lower LTVs often result in lower monthly payments, potentially improving your cash flow. While a higher LTV can amplify returns in a rising market, it also increases risk in a downturn.

LTV also affects your flexibility as an investor. A lower LTV provides more room to weather market fluctuations or unexpected expenses. It's important to remember that as property values change over time, so does your LTV. In a rising market, your LTV will decrease if you maintain the same loan balance, potentially allowing you to leverage that equity for further investments or better loan terms.

How do I calculate loan to value?

Calculating LTV is straightforward. You divide the loan amount by the property's value and multiply it by 100 to get the percentage. For example, if you're borrowing £150,000 on a property valued at £200,000, your LTV would be (£150,000 / £200,000) x 100 = 75%. This means you're financing 75% of the property's value and have 25% equity. This simple calculation gives both you and the lender a clear picture of how much of the property's value is being financed by the loan, helping to understand the level of risk involved.

Why is loan to value important for investors?

Understanding LTV is crucial for several reasons. Firstly, lenders use LTV to assess risk, so a lower LTV often increases your chances of loan approval. Additionally, LTV can significantly impact your interest rates. Generally, lower LTV ratios may result in more favourable interest rates, potentially saving you thousands over the loan term.

LTV is a fundamental concept in property investment that affects your borrowing capacity, loan terms, and overall investment strategy. By understanding and strategically managing your LTV, you can make more informed decisions, potentially improve your returns, and better manage your risk in property investment.

LTV is not just a number for lenders; it's a powerful tool for investors to gauge their position and make strategic decisions. Whether you're just starting in property investment or you're an experienced investor looking to optimise your portfolio, a solid grasp of LTV and its implications is essential.

Remember, while LTV is a crucial metric, it's just one part of the larger picture of property investment. Always consider it in conjunction with other factors such as cash flow, market trends, and your overall investment goals. As with any significant financial decision, you should consult financial advisers and mortgage professionals.

This information does not constitute advice or a personal recommendation. As with any investment your capital is at risk and you should seek advice concerning suitability from your investment adviser. TAB is not authorised by the Financial Conduct Authority. Investments are not regulated and you will have no access to the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS).