In the UK, Combined Loan to Value (CLTV) ratio is a financial metric used primarily in mortgage lending. It represents the ratio of the total amount borrowed (through mortgages and any other loans secured against the property) to the value of the property being purchased or refinanced. Here’s how CLTV is calculated and its significance:
Calculation of CLTV:
- Total Loan Amount: This includes the primary mortgage being applied for and any secondary loans or mortgages on the property.
- Property Value: The estimated or appraised market value of the property.
CLTV=Total Loan AmountProperty Value×100%\text{CLTV} = \frac{\text{Total Loan Amount}}{\text{Property Value}} \times 100\%CLTV=Property ValueTotal Loan Amount×100%
Significance of CLTV:
- Risk Assessment: Lenders use CLTV to assess the risk associated with providing loans secured against the property. A higher CLTV indicates a greater financial risk because the borrower has less equity (ownership) in the property.
- Loan Approval: Lenders typically have maximum CLTV limits they are willing to accept based on the type of mortgage and the borrower’s financial profile. This helps them manage risk exposure.
- Insurance Requirements: Higher CLTV ratios may require the borrower to pay for mortgage insurance to protect the lender in case of default.
- Refinancing: CLTV is also important in refinancing scenarios, where borrowers may want to access additional funds based on the equity in their property.
Example:
Suppose a property is valued at £300,000, and a borrower wants to apply for a primary mortgage of £240,000 and a secondary loan of £30,000 (e.g., a home equity loan).
Total Loan Amount=£240,000+£30,000=£270,000\text{Total Loan Amount} = £240,000 + £30,000 = £270,000Total Loan Amount=£240,000+£30,000=£270,000
CLTV=£270,000£300,000×100%=90%\text{CLTV} = \frac{£270,000}{£300,000} \times 100\% = 90\%CLTV=£300,000£270,000×100%=90%
In this example, the CLTV ratio is 90%, indicating that the borrower would have borrowed 90% of the property’s value, leaving a 10% equity stake.
Summary:
CLTV is a critical metric in mortgage lending in the UK, used to assess risk and determine the amount of financing a borrower can obtain relative to the value of the property. It helps lenders make informed decisions about loan approvals and manage their exposure to financial risk. Borrowers should be aware of their CLTV ratio and how it affects their mortgage terms, insurance requirements, and overall financial planning.