What is Loan To Value (LTV)?
At The House Crowd, we get a lot of questions from investors about the term ‘LTV’.
Loan to Value (LTV) – A term commonly used by banks and building societies to represent the ratio of the first mortgage lien* as a percentage of the total appraised value of real property. For instance, if someone borrows £130,000 to purchase a house worth £150,000, the LTV ratio is £130,000 to £150,000 or £130,000/£150,000, or 87%. The remaining 13% represent the lender’s ‘haircut’, adding up to 100% and being covered from the borrower’s equity. The higher the LTV ratio then the riskier the loan is for a lender.
(* Lien – the right to keep possession of property belonging to another person until a debt owed by that person is discharged)
Still confused? Well, let’s try and clear things up…
Basically, LTV, or Loan-to-Value is a statement about how much borrowing you have compared to the value of your property. So if your property is worth £100,000 and you have a £75,000 loan secured against the property – that loan is at 75% LTV.
The lender knows that if you default on the loan as long as the property is sold for more than 75% of its valuation (at the time the loan was made) then he will not lose any money.
Let’s try and simplify that with a handy diagram:
At The House Crowd our secured loans have a maximum value of 75% LTV and are secured by a legal charge against the property. All these charges are registered directly with the Land Registry, ensuring that any further deals or sales of the property include the charge owners correctly within the process.
If they are secured by a second charge then the LTV is based on the total borrowing including the first charge against the property value.
For example: if a property is valued at £600,000 and a bank has a first charge on that property that requires a sum of £200,000 to clear, if we then loan a further £200,000 this would take the total borrowing to £400,000 and therefore result in a combined LTV of 66.7%.
If the borrower defaults on the loan, but not on the 1st charge, then we would repossess and sell the property. The 1st charge holder would be paid first, and then we would take any capital amount owed to us and any interest.
This is what would happen:
What Can I Do To Buffer My Property Investment Against Market Fluctuations?
Our loans are usually for less than 12 months. We believe limiting our loans to 75% LTV provides a reasonable level of security should the value of the property fall during that short period, whilst allowing us to pay our investors a very healthy return. If you are more risk averse then you may choose to invest in loans with a lower LTV (but are likely to receive a lower rate of return as borrowers will expect to pay a lower interest rate.)
Investing in this way allows you to make great returns from property investment without you ever having to lay a finger on the property yourself!
I’ve Still Got Questions – Help!
If you’ve still got questions, then don’t hesitate to drop us a line. We have the chat option on our website, or you can give us a bell or an email. We’re always happy to help!