Concepts
Loan to value explained: how a bigger deposit can cut your rate
Loan to value, or LTV, is the size of your mortgage as a percentage of the property's value. Borrow £240,000 on a £300,000 home and your LTV is 80%. It is the single biggest thing, after the type of deal, that decides which rates you are offered.
Lenders price in bands
Lenders do not set a different rate for every possible LTV. They group deals into bands, typically 60%, 75%, 80% or 85%, 90% and 95%. Your loan has to fit under a band's maximum to get that band's rates. The lower the band, the less risk the lender takes, and the lower the rate tends to be.
That means a small change in deposit can make a big difference if it moves you across a band edge, and no difference at all if it does not.
An example
On a £300,000 home over 25 years, with illustrative 2 year fixed rates for each band:
| Deposit | LTV | Rate | Monthly |
|---|---|---|---|
| £30,000 | 90% | 5.55% | £1,666.11 |
| £45,000 | 85% | 5.35% | £1,543.16 |
| £60,000 | 80% | 5.20% | £1,431.12 |
| £75,000 | 75% | 5.10% | £1,328.47 |
Going from a £30,000 to a £45,000 deposit cuts the payment by about £123 a month. Most of that, around £93, is simply because you are borrowing £15,000 less. The other £30 or so comes from the better rate for the 85% band, worth roughly £730 over a 2 year deal.
Higher up, the rate steps get smaller. Moving from 80% to 75% LTV saves about £103 a month, but only around £13 of that is from the rate.
The biggest rate jumps are usually at the top of the range, between 95%, 90% and 85%. That is where a little extra deposit goes furthest.
Watch the band edges
If your LTV is just over a band limit, it can be worth finding the difference. On a £300,000 home, a 75% LTV deal allows a loan of up to £225,000. If you need £226,500 (75.5%), you fall into the next band and pay its higher rate on the whole loan. Finding an extra £1,500 of deposit, or negotiating the price down slightly, could bring you back under.
Bear in mind the LTV is based on the lender's valuation, not the price you agree. If the valuation comes in lower than the price, your LTV goes up.
Remortgaging
LTV matters when you remortgage too. Over a few years you pay down some of the loan, and if your home has gone up in value your LTV falls further. You may find yourself in a cheaper band than when you bought, so it is worth checking an up-to-date estimate of your home's value before you compare deals.
Comparing on Excelergy Mortgages
Enter your property value and deposit (or switch to Borrow and enter the loan) and the site shows your LTV and only the deals you could qualify for. In the Max LTV filter, greyed-out bands are out of reach; hover over one to see the deposit you would need for it.