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Loan to valuation
The interest rate a borrower may pay on a mortgage is often dependant on the inital deposit that the borrower can put down e.g. if a house is valued at £100,000 and the saver can put down a deposit of £20,000 then the loan is for £80,000 and thus the loan to valuation is only 80%.
An 80% loan to valuation is considered a low risk mortgage as the house price could fall be 20% before the loan exceeds the house price. This protects the lendor. Thus the interest rate on such a mortgage may be lower than a high loan to valuation mortgage.
A mortgage with a high loan to valuation of 120% is considered high risk as the borrower immediatly starts with negative equity. If the borrower fails to keep up with repayments then the lendor may loose money when they reposse the property. Note: The lender will always try and charge the borrower for any losses that they incur.
The loan to valuation ratio is a critical topic for Buy to let (BTL) mortgages. BTL mortgages typically have high loan to valuation ratios and the mortgage contract often contains wording that allows the lendor to demand more capital payments from the borrower if the ratio exceeds the amount specified in the contract. This clause can be triggered by falling house prices, thus BTL landlords may soon recieve letters from Banks or Building Society demanding lump sum payments. These letters could trigger a collapse in the BTL market as hard pressed landlords rush to sell.