How does bad credit affect loan-to-value?

Loan to Value refers to the size of the loan you’ll be taking in relation to the value of the property you’ll be buying.

For example, if you’re buying a house worth £400,000 and taking out a mortgage of £300,000, your LTV will be 75%, meaning you’ll be paying for 75% of the property with your mortgage and the remaining 25% with your deposit. 

But how is your LTV affected if you’ve struggled with bad credit in the past? This guide will explain everything you need to know about LTV.

In this guide, you’ll find:

• How Does My Credit Score Affect LTV?

• Why Does a Lower LTV Help?

• Can I Get a Mortgage with Bad Credit and a High LTV?

• Can I Borrow to Improve My LTV?

• Does All Bad Credit Affect My LTV the Same?

How does my credit score affect LTV?

Typically, lenders will want you to put down a deposit of around 10%. But the more you can put down the better, because it means you owe less back to the lender. Plus, a higher deposit usually means you can get access to better mortgage rates too.

If you have a low credit score, it’s likely that you might be asked to increase your deposit to at least 15%. That would mean an LTV of 85%.

To lower your LTV, you’ll have to put a larger deposit down on the home you’re buying. If you can increase your deposit to 20% or 30%, it’ll help you to get the best rates possible. 

Why does a lower LTV help?

If you have a low credit rating, or any issues with credit in the past, a lower LTV proves to the lender that you’re going to be able to comfortably keep up with your monthly payments. That’s because your monthly mortgage repayments will be lower if you put down a bigger deposit. A bigger deposit means a lower LTV. So the lower you can make your monthly repayments, the better.  

Putting a bigger deposit on the property shows you’ve managed your finances well enough to build up a deposit, and you’re reducing the amount that you have to borrow from the lender.

If you can reduce the amount you’re borrowing, a lender sees this as ‘lower risk’ to them. Which makes you easier to lend to than if you wanted to borrow a lot more money for a mortgage. 

Can I get a mortgage with bad credit and a High LTV?

It can be difficult to get a mortgage if you have credit issues and a high LTV. But there are still options open to you. A specialist mortgage broker is always the best way to go if this is your situation. Having bad credit and a high LTV ratio sadly means a lot of mainstream lenders won’t accept you. That’s because they see it as risky to lend to you. But there’s plenty of specialist lenders who will consider you.  

If you have bad credit and can’t afford a big deposit, an option you could look into is getting a guarantor mortgage. That’s where someone else (usually a close family member or friend) will agree to pay your mortgage for you if you can't at any point. They won’t be named on the mortgage, but the responsibility will fall to them to pay it if you struggle to do so.

This is a large commitment for the person agreeing to be your guarantor. But if you choose someone you really trust, it’s a great option to consider. 

If you’re struggling with bad credit and can’t afford a big deposit to lower your LTV ratio, a guarantor mortgage could be an option to look into.

Can I borrow to improve my LTV?

If you have a bad credit rating but are struggling to raise the money that you need to lower your LTV then you might want to explore whether you can borrow money for your deposit.

This is definitely an option, but lenders will want to know where the money is coming from.

For example, if you’ve had a loan from your family, or perhaps have built up savings or equity in another property, then these could be used to fund your deposit and improve your LTV.

Does all bad credit affect my LTV the same?

No, different types of credit activity have a different effect on your LTV. Some credit issues are more severe than others and can have different levels of effect. It also depends exactly how long ago the credit issues occurred, because if they were a long time ago, they might not affect your credit score as much.

For example, smaller issues such as late payments usually mean that you’ll be ok to put down a deposit of 10% to 15%.

However, if you’ve missed mortgage payments in the past, or have had a county court judgement (CCJ) recently, these kinds of issues will affect your LTV more. In some cases, lenders will ask for a deposit of up to 30%.

Issues such as bankruptcy and having had a home repossessed would require a deposit of around 40%.