Loan to value (LTV) or not loan to value
That is the question. Shakespeare just when you weren’t expecting it! LTV is a pretty common acronym in property lending, it refers to the loan amount in relation to the property value.
As with most things about money, what should be simple is never quite as simple as it could be.
The thing with LTV is that many borrowers, especially those involved with investment property, use LTV to see what they can leverage against their property. Lenders for their part advertise the LTV they will lend up to.
The problem that many borrowers come up against is that they plan their budgets based on borrowing to a set LTV only to find that it doesn’t quite work. The problem is that different lenders have different ways they apply LTV.
If you know how the lender uses LTV then it can save you time, trouble and money. Here are the main ways LTV is calculated.
Open market value
Open market value, or OMV is best thought of as the value of your property if you were to place it on the market and be happy to wait for the property to sell. For most borrowers, the value of any property is the OMV. Not unreasonably it is OMV that borrowers work their figures on.
Some lenders will calculate how much they will lend based on open market value. It is pretty common to see the high street and tier two lenders use OMV. If you are borrowing over a 5-year term then most lenders will work on OMV. A 70% LTV based on OMV means you can borrow up to 70% of the property value. Simple.
90 or 180-day value
The other application you get is lenders who work out their LTV based on a 90 or 180-day valuation. This means the value of the property should it need to be sold inside 90 days or inside 180 days, for the layman it is a ‘firesale’ valuation.
Typically lenders who are lending on a period of 5 years or less are more likely to work out their LTV based on these valuations.
For the borrower, a 180-day valuation is generally around 10% lower than OMV. A 90-day valuation usually carries a higher discount.
Why it matters
The need to establish how a lender applies LTV is key as it is rarely communicated clearly upfront. It is never hidden, just not well publicised. There is a theory that lenders who work on 90-day values are looking to sell quickly in the event of enforcement, it isn’t necessarily the case but given it has those connotations you can understand why it is not overtly publicised.
The cost problem for borrowers is that how LTV is calculated often only comes to light once a valuation has been completed, hence after the borrower has incurred a cost. If you can establish how your lender is working LTV then you can save yourself a lot of time, and money.
We will always communicate how our lenders work things out, if you are arranging things yourself then it is well worth checking.
By Dave Farmer