Buying property on mortgage is common all over the world including UK. People prefer paying the price of an apartment or house in the form of installments so that immense financial burden is not exerted. As an applicant, you have to provide detailed information regarding financial parameters. Banks perform an in-depth analysis of each submitted application. Various calculations are performed so that the actual standing of the applicant can be checked properly. What is LTV (Loan to Value) ratio? Does it have a big impact on the approval or rejection of a loan application? LTV is a very important factor and does play a decisive role. You can calculate LTV on LTV calculator by calculators.tech while a loan application is under review.
Looking at the calculation formula of LTV
LTV does not have a complicated formula. Very simple steps are performed to calculate it.
The formula for LTV is given as under.
LTV = Mortgage Payment / Property Price *100
- If you have a look at the formula given above, you would see that two core components are used to calculate LTV. As it is shown above, it is the ratio of mortgage payment and property price. Let us have a look at each of these components.
- Mortgage payment is the amount that has been taken from the bank. It is important consider the stamp duty percentage because it will be an additional financial sum. The mortgage payment is divided by the property price. This gives a ratio. As LTV is calculated with the percentage unit, this ratio is multiplied by 100.
Impact of LTV
The calculation of LTV has a proper purpose. It is used as a financial benchmark. It is important to properly measure the financial stability of a loan applicant. Would he be able to pay off the mortgage sum? Does he have the stability of making all the mortgage payments? Is there a constant source of income? These are some of the key questions which loan giving companies have.
- Ideally, it is said that the LTV percentage should be less than or equal to 80%. If you are unable to pay 20% of the sum as down payment, a big question mark would be raised about whether the complete payment would be made without any hassle or not. Hence, it can be said that LTV percentage is an important factor by all means. It is calculated when the application is being reviewed. The chances of getting a mortgage approval are low if the LTV is more than 80.
Reducing LTV is important
In a nutshell, it can be said that the LTV should be as low as possible. Someone who has an LTV of 40% would have greater chances of approval than a person who has an LTV of 75%. Having a lower LTV is a sign that the applicant is financially strong and would not face hardships while making payments. On the other hand, if someone has a high LTV, it means that the risk of not getting mortgage payments would be there.
Thus, reducing the LTV should be the aim at all times. Here are two main methods to reduce LTV.
1. Pay a higher sum as down payment
The mortgage sum is the difference between the down payment and the total property price. If the price of the property is £ 50,000 and £10,000 is the down payment, then £40,000 would be the mortgage payment. If the mortgage payment is reduced. The down payment is not the only decisive factor. You have to keep an eye on the mortgage payment as well. The monthly payment amount should not be more than what you can afford. As an individual, you should analyze things at your own end and then make a move accordingly. If you think that you do not have constant earnings or the amount is not that high, do not take a large mortgage sum. It would hurt you once you start paying the monthly payments.
2. Opt for a property with lower price
As it is mentioned above, the property price should be selected according to the financial standing you have. If you are not financially strong then it is better not to opt for an expensive property piece. If the price of the property is low, it would be easier to get the mortgage sum as the amount would be lower. Most people do not check their financial standing and select the property. This proves to be a problem for them when the monthly payments start. They have to pay large financial sums which prove to be an issue.
- People are normally hasty when they are checking property options. This is not wise thinking. Property is not something which you purchase every day. It requires careful thinking so that you can end up with the correct choice. You need to check different parameters and then make a selection. The price of the property is obviously a critical factor. If you think that the mortgage payments would be hard to manage, opt for a property with lower price.
Summing it up
Checking all important parameters before you go ahead with a property selection is very important. You should be sure that your financial standing is according to the purchased property. Employment stability is an important aspect in this relation. Not having a stable income is a risk factor when you are opting for property options. You can get stuck while making the monthly payments.
Should you pay the maximum sum as down payment? The answer to this question is yes. It is a fact that you need to pay a minimum of 20% as down payment but you can easily pay a greater percentage and reduce the burden on your head. If you think that you can easily pay 40% as down payment then it is a recommended option. Paying a higher percentage as down payment is better because you have fewer burdens for mortgage payments. It reduces the LTV which actually increases the possibility of getting the mortgage application approved.