Loan to Value Ratio Calculator for Remortgages: A Comprehensive Guide

The Loan to Value (LTV) Ratio is a critical metric used in the mortgage industry to assess the risk associated with a loan. When considering a remortgage, understanding and calculating your LTV ratio is essential for determining your financial options and obtaining favorable loan terms. This guide provides a detailed overview of how to calculate LTV, its significance, and how it impacts your remortgage decision.

What is Loan to Value Ratio?

Loan to Value Ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It is a crucial component in mortgage lending and plays a significant role in the remortgage process.

The formula to calculate LTV is:

$\text{LTV}=\left(\frac{\text{Loan Amount}}{\text{Property Value}}\right)\times 100\%$LTV=(Property ValueLoan Amount​)×100%

For example, if you are purchasing a property worth $200,000 and you are borrowing $150,000, your LTV ratio would be:

$\text{LTV}=\left(\frac{150,000}{200,000}\right)\times 100\%=75\%$LTV=(200,000150,000​)×100%=75%

Why is LTV Important?

The LTV ratio is a key indicator of the risk to the lender. A higher LTV ratio suggests that the borrower is financing a large portion of the property’s value with debt, which may be seen as a higher risk. Conversely, a lower LTV ratio indicates that the borrower has more equity in the property, which generally poses less risk to the lender.

Key reasons why LTV is important:

• Interest Rates: Higher LTV ratios often result in higher interest rates. Lenders may charge a premium for higher LTV loans to compensate for the increased risk.
• Loan Approval: Lenders use LTV ratios to decide whether to approve a loan application. A high LTV may result in rejection or require additional conditions.
• Insurance Costs: In some cases, a higher LTV may require private mortgage insurance (PMI), which adds to the overall cost of the loan.

How to Calculate LTV for Remortgages

When remortgaging, the LTV ratio is calculated using the new mortgage amount and the current value of the property. Here’s a step-by-step guide to calculating your LTV for a remortgage:

1. Determine the Current Property Value: Obtain an accurate valuation of your property, which can be done through an appraisal or a real estate agent.

2. Determine the New Loan Amount: Decide how much you want to borrow or how much you need for the remortgage.

3. Calculate the LTV Ratio: Use the formula:

   $\text{LTV}=\left(\frac{\text{New Loan Amount}}{\text{Current Property Value}}\right)\times 100\%$LTV=(Current Property ValueNew Loan Amount​)×100%

For example, if your property is valued at $300,000 and you are applying for a new loan of $240,000:

$\text{LTV}=\left(\frac{240,000}{300,000}\right)\times 100\%=80\%$LTV=(300,000240,000​)×100%=80%

Impact of LTV on Remortgage Options

1. Interest Rates: Higher LTV ratios may result in higher interest rates. Lenders may view higher LTV loans as riskier and charge a higher rate to offset this risk. It is often advantageous to aim for a lower LTV ratio to secure a more favorable interest rate.

2. Loan Terms: The terms of your remortgage, including the length of the loan and repayment conditions, can be influenced by your LTV ratio. A lower LTV may give you access to better terms and more flexible options.

3. Lender Requirements: Lenders may have different requirements based on LTV ratios. For example, some lenders may offer special products or discounts for lower LTV loans.

4. Equity Release: If you have significant equity in your property, you might be able to access a larger loan amount or better terms through remortgaging.

Using an LTV Calculator

To simplify the process, many lenders and financial websites offer LTV calculators. These tools allow you to input your property value and desired loan amount to instantly see your LTV ratio. Here’s how to use a typical LTV calculator:

1. Enter Property Value: Input the current market value of your property.
2. Enter Loan Amount: Input the amount you wish to borrow.
3. Calculate LTV: The calculator will compute the LTV ratio and provide a percentage.

Example LTV Calculator:

Property Value	Loan Amount	LTV Ratio
$250,000	$200,000	80%
$300,000	$240,000	80%

Factors Affecting Property Value

The property value plays a significant role in calculating your LTV ratio. Factors that can influence property value include:

• Market Conditions: Fluctuations in the housing market can affect property values. Economic conditions, interest rates, and local market trends can all play a role.
• Property Improvements: Renovations or upgrades can increase property value.
• Location: The value of a property is also influenced by its location, including local amenities, schools, and neighborhood desirability.

Reducing Your LTV Ratio

If your current LTV ratio is high and you want to reduce it to obtain better remortgage terms, consider the following strategies:

1. Increase Equity: Make extra payments toward your mortgage or make a larger lump sum payment to reduce your loan balance.
2. Improve Property Value: Invest in home improvements that increase the property’s value.
3. Refinance: Look for refinancing options that may offer lower LTV ratios and better terms.

Conclusion

Understanding and calculating your Loan to Value (LTV) ratio is crucial when considering a remortgage. By knowing your LTV ratio, you can better assess your borrowing options, negotiate better terms, and make informed decisions about your remortgage. Always consider consulting with a financial advisor or mortgage professional to guide you through the process and help you achieve the best possible outcome.