What is loan-to-value, and why does it change the rate you get?
Loan-to-value is the size of the mortgage as a percentage of the property's value — and it is the single biggest determinant of the interest rate offered, because it determines how much the lender loses if things go wrong.
The arithmetic. Borrowing £180,000 against a £200,000 property is 90% LTV. A larger deposit means a lower LTV.
Why lenders price on it. If a borrower defaults and the property is repossessed and sold, the lender recovers from the sale proceeds. At low LTV there is a large equity cushion absorbing a fall in prices and the costs of sale; at high LTV a modest fall means the sale does not cover the debt. The rate reflects the lender's loss given default, not just the chance of default.
Why rates move in steps, not smoothly. Lenders price in bands — typically 60%, 75%, 80%, 85%, 90% and 95%. The difference between bands can be substantial, and the difference within a band is nothing. This produces the most actionable fact about mortgages: a small additional deposit that pushes you just over a band threshold can cut the rate materially, while a larger sum that leaves you in the same band changes nothing.
Where the valuation matters. LTV uses the lender's valuation, not the price you agreed. A down-valuation raises your LTV, which can push you into a worse band or break the application entirely — one of the most common reasons purchases fall through.
What else it affects: product availability, since the best deals sit at low LTV; fees; and whether certain property types are lent on at all.
How it changes over time. LTV falls as you repay capital and as prices rise, so remortgaging into a lower band is a routine way to reduce payments. Conversely, falling prices raise it, and reaching 100% is negative equity, which restricts remortgaging and moving.
Related terms: loan-to-income caps operate separately, and high-LTV lending may carry additional conditions or guarantee schemes.
General information, not financial advice.