Loan-to-value explained: how your deposit shapes your mortgage

Loan-to-value (LTV) is the size of your mortgage as a percentage of the property's value. Borrow 240,000 against a 300,000 home and the LTV is 80%, with a 20% deposit. Lenders use LTV to judge risk, so a lower LTV generally gets a lower interest rate and more choice of mortgages. The loan-to-value calculator works out your LTV and the deposit needed to reach each lower band.

What LTV means

LTV = mortgage amount ÷ property value × 100. The deposit is the other side of the same number: an 80% LTV means a 20% deposit, and a 90% LTV a 10% deposit. LTV matters to lenders because it is their safety margin. If you cannot repay and the home has to be sold, a lender with an 80% loan has a 20% cushion against falling prices and selling costs; at 95% the cushion is thin. Australia uses the same idea under the name LVR (loan-to-value ratio).

LTV bands and pricing

Lenders usually price mortgages in bands, commonly 60%, 75%, 80%, 85%, 90% and 95%. Each band has its own rates, and the best rates are usually kept for the lowest bands. Moving from just above a band edge to just below it can cut the rate noticeably, and that saving applies to the whole loan for the whole fixed period. That is why it often pays to check whether a little more deposit would push you into the next band down. Band edges, rates and criteria vary between lenders and change over time, so treat the bands as a pattern rather than a rule.

The deposit for a better band

Suppose you are buying a 250,000 home with a 25,000 deposit. The mortgage is 225,000 and the LTV is 90%. The calculator's table shows what each lower band would take:

• 85% LTV: maximum mortgage 212,500, deposit 37,500, so 12,500 more.
• 80% LTV: maximum mortgage 200,000, deposit 50,000, so 25,000 more.
• 75% LTV: maximum mortgage 187,500, deposit 62,500, so 37,500 more.

Whether finding the extra is worth it depends on the rate difference between bands, how long it would take to save, and what happens to prices meanwhile. Compare the monthly payments in the mortgage calculator at each band's rate, and use the savings goal calculator to see how long the extra deposit would take to build.

Mortgage insurance at high LTV

In some countries a high LTV also brings an insurance cost that protects the lender. In the US, conventional mortgages with less than 20% down usually require private mortgage insurance (PMI); federal rules let you ask to cancel it once the balance reaches 80% of the home's original value, and it generally ends automatically at 78%. Canada requires mortgage default insurance when the down payment is under 20%, and Australian lenders commonly charge lenders mortgage insurance above 80% LVR. In the UK there is usually no separate insurance; the cost of a high LTV shows up in the rate instead. Either way, the 80% line often matters more than any other.

LTV when you remortgage

Your LTV is not fixed. It falls as you repay principal and as the property rises in value, and it rises if prices fall. Suppose you bought a 300,000 home with a 270,000 mortgage (90% LTV). Some years later you owe 240,000 and the home is valued at 320,000: your LTV is now 75%, which may qualify you for a much better rate when your current deal ends. How mortgage amortization works, and why overpaying early matters shows how the balance falls over time, and the refinance calculator compares a new rate with your current one. If prices fall far enough that you owe more than the home is worth, the LTV is over 100%, which is called negative equity and makes switching lenders difficult.

What the calculator cannot know

The calculator uses the value you enter, but a lender uses its own valuation, and usually the lower of that and the price you pay. If you agree to pay 250,000 and the valuation comes in at 240,000, a 225,000 mortgage becomes about 93.75% LTV, which can push you into a higher band or reduce what the lender will offer. It also cannot check affordability, which lenders test separately from LTV; the home affordability calculator gives a rough idea. Nothing you enter is stored. If you are weighing a bigger deposit against paying for a lower rate, Mortgage points explained: when buying down the rate pays off covers the US option of buying the rate down.