Understanding LTV Ratios: A CeMAP Guide

Introduction

Loan-to-Value (LTV) is one of the most fundamental concepts in mortgage lending, and it appears frequently in CeMAP Module 2 examinations. Whether you're studying for your MRT1 or MRT2 units, you need a solid understanding of what LTV means, how to calculate it, and why it matters to lenders, borrowers, and advisers.

This guide explains LTV from the ground up, works through several examples, and highlights how the concept is tested in CeMAP exams.

What Is LTV?

Loan-to-Value (LTV) expresses the mortgage amount as a percentage of the property's value. It tells you how much of the property is funded by the mortgage and, by extension, how much is funded by the borrower's deposit or existing equity.

The formula is straightforward:

LTV = (Mortgage Amount / Property Value) x 100

For example, if you borrow £180,000 to buy a property worth £200,000, your LTV is:

(£180,000 / £200,000) x 100 = 90% LTV

This means the mortgage covers 90% of the property's value, and the borrower's deposit covers the remaining 10%.

Why LTV Matters

LTV is one of the most important factors in mortgage lending because it directly reflects the level of risk for the lender. The higher the LTV, the greater the proportion of the property's value that is funded by the loan — and the greater the lender's potential loss if the borrower defaults and the property needs to be sold.

Impact on Interest Rates

Lenders price their mortgages according to risk. Lower LTV mortgages attract lower interest rates because the lender's exposure is reduced. A borrower at 60% LTV will almost always be offered a better rate than a borrower at 90% LTV, all other things being equal.

This is why saving a larger deposit can make a significant financial difference over the life of a mortgage. Even moving from 90% LTV to 85% LTV can unlock noticeably better rates.

Impact on Product Availability

Not all mortgage products are available at every LTV level. Many of the most competitive deals are reserved for borrowers at 75% LTV or below. At higher LTVs (90% and above), the range of available products narrows, and those that are available tend to carry higher interest rates and stricter criteria.

At the top end, 95% LTV mortgages are available but with a limited selection of lenders and higher rates. Very few lenders offer products above 95% LTV for standard residential purchases.

Risk Assessment

From the lender's perspective, LTV is a key component of their risk assessment. A lower LTV provides a larger buffer against falling property values. If a borrower at 60% LTV defaults and the property needs to be sold, the property value would need to fall by more than 40% before the lender faces a loss. At 95% LTV, a fall of just 5% would put the lender in a loss position.

LTV Bands Explained

Lenders typically group their products into LTV bands. Understanding these bands is important both for advising clients and for CeMAP exams:

60% LTV and Below

The best interest rates are usually found at this level. Borrowers here have substantial equity or a large deposit, representing minimal risk to the lender. This band is common among home movers who have built up significant equity in their current property.

75% LTV

A widely used threshold that opens up a broad range of competitive products. Many remortgage and home-mover deals are priced at this level. Moving from 80% to 75% LTV often produces a noticeable improvement in available rates.

85% LTV

A common band for first-time buyers who have saved a 15% deposit. Products are readily available, though rates will be higher than at 75% LTV.

90% LTV

Another key threshold, particularly for first-time buyers. A 10% deposit is a common target for many new buyers. Products are available from most major lenders, but the rate premium over lower LTVs becomes more apparent.

95% LTV

The highest LTV widely available for standard residential mortgages. Borrowers need only a 5% deposit, but will pay the highest rates and have the fewest product options. Some government-backed schemes have historically supported lending at this level.

Worked Examples

Example 1: First-Time Buyer

Sarah is buying her first property for £250,000. She has saved a deposit of £25,000 and needs a mortgage of £225,000.

LTV = (£225,000 / £250,000) x 100 = 90% LTV

Sarah falls into the 90% LTV band. She'll have access to a reasonable range of products, but could secure better rates if she were able to increase her deposit to £37,500 (85% LTV) or £62,500 (75% LTV).

Example 2: Home Mover with Equity

James is selling his current property for £300,000 and has an outstanding mortgage of £150,000, giving him £150,000 in equity (before sale costs). He's buying a new property for £400,000 and needs a mortgage of £250,000.

LTV = (£250,000 / £400,000) x 100 = 62.5% LTV

James benefits from a low LTV thanks to the equity he's built up. He'll qualify for some of the most competitive rates on the market.

Example 3: Remortgage with Changed Property Value

Rachel took out a mortgage of £180,000 five years ago on a property then valued at £200,000 (90% LTV). She has since repaid £20,000 of the capital, reducing her outstanding balance to £160,000. Her property has also increased in value to £240,000.

New LTV = (£160,000 / £240,000) x 100 = 66.7% LTV

Rachel's LTV has improved dramatically — from 90% to under 67% — through a combination of capital repayment and property price growth. When she remortgages, she'll be able to access significantly better rates than when she first borrowed.

How LTV Changes Over Time

LTV is not static. It changes throughout the life of a mortgage due to two factors:

Capital Repayment

If the borrower has a repayment mortgage (as opposed to interest-only), each monthly payment reduces the outstanding loan balance. Over time, this steadily reduces the LTV. The effect is slow in the early years (when most of each payment goes towards interest) and accelerates in later years.

Property Value Changes

If the property increases in value, the LTV falls — even if no capital has been repaid. Conversely, if property values decline, the LTV rises. In extreme cases, falling property values can push the LTV above 100%, a situation known as negative equity.

Negative equity occurs when the outstanding mortgage balance exceeds the current value of the property. For example, if a borrower owes £195,000 on a property now worth £190,000, their LTV is approximately 103%. The borrower effectively owes more than the property is worth, which creates significant problems if they need to sell or remortgage.

Related Concepts

Equity

Equity is the opposite side of LTV. It represents the portion of the property's value that the borrower owns outright. If a property is worth £300,000 and the mortgage balance is £200,000, the borrower has £100,000 of equity (33.3%). As LTV falls, equity rises.

Loan-to-Income Ratio (LTI)

While LTV measures the loan against the property value, loan-to-income (LTI) measures the loan against the borrower's annual income. Lenders use both metrics in their affordability assessments. A typical maximum LTI is 4 to 4.5 times the borrower's gross annual income, though some lenders may go higher in certain circumstances.

Both LTV and LTI are important tools in a lender's risk assessment, and CeMAP exams may test your understanding of how they work together.

LTV in CeMAP Exams

LTV is a commonly tested topic in Module 2, appearing across both the MRT1 and MRT2 units. You may encounter questions that ask you to:

• Calculate the LTV given a property value and mortgage amount
• Determine the deposit required for a specific LTV on a given property
• Explain why LTV affects interest rates and product availability
• Identify negative equity from a set of figures
• Understand how LTV changes over the life of a mortgage

Exam Tips for LTV Questions

• Memorise the formula — LTV = (Mortgage Amount / Property Value) x 100. It's simple, but under exam pressure you need it to be automatic.
• Watch the numbers — Questions may give you the deposit rather than the mortgage amount. Remember: Mortgage Amount = Property Value - Deposit.
• Understand the principle — Don't just memorise calculations. Understand why a lower LTV means lower risk, and why that translates to better rates. Exam questions may test your reasoning, not just your arithmetic.
• Know the bands — Be aware of the key LTV thresholds (60%, 75%, 85%, 90%, 95%) and what they mean in practice.

Practise LTV Questions

LTV calculations are among the most predictable topics in CeMAP Module 2 — if you can calculate LTV quickly and accurately, you're banking reliable marks. The best way to build that confidence is through repeated practice with realistic exam questions.

Practise LTV and mortgage calculations and make sure this topic is one you can count on in your exam.