75% LTV of What? The Valuation Question Every Investor Needs to Ask

Every lender quotes loan-to-value percentages. 75% LTV on buy-to-let. 65% loan to GDV on development finance. 80% loan to cost. These numbers feel concrete. They are not, until you understand what the denominator actually is.

The Standard Buy-to-Let: Lower of Purchase Price or Valuation

On a standard buy-to-let mortgage, lenders will advance 75% of the lower of the purchase price or the market valuation. This is the most common scenario and the one most people understand at a basic level.

If you are buying a property for £200,000 and it values at £200,000, you need a £50,000 deposit and can borrow £150,000. Straightforward.

If the valuation comes back at £180,000 on a property you are buying for £200,000, the lender will lend 75% of £180,000, not £200,000. Your deposit requirement increases. You either make up the shortfall, renegotiate the purchase price down, or walk away.

Conversely, if you are buying at £180,000 and the valuation comes back at £200,000, the lender still lends against the purchase price. They will not advance you 75% of a number higher than what you paid. The valuation being above the price is useful confirmation you are buying well, but it does not increase the loan.

The Three Numbers That Are Not All the Same

Lenders increasingly instruct valuations that ask for multiple figures. The open market value, the 180-day value, and the 90-day value often appear in the same report.

Open market value assumes no time constraint on the sale. The property can sit on the market as long as needed to find the right buyer at the right price.

The 180-day value (six months) and 90-day value (three months) apply time pressure. If you had to sell within that window, what would you need to price it at? The answer is typically lower, particularly for niche or specialist properties.

For standard residential properties in active markets, the difference between these figures is often modest, perhaps 5-10%. For more unusual properties, commercial assets, HMOs in thin markets, or properties in secondary locations, the gap can be substantial.

The problem arises when a lender says they lend at 75% LTV but then uses the 180-day or 90-day figure as their base rather than the open market value. Or when a large gap between the figures causes the underwriter to apply a more conservative stance to the lending.

Bridging Finance: More Complexity

In bridging finance, the variability increases. Some lenders explicitly lend against the 90-day value rather than open market value. Others lend against open market value but with an eye on what the restricted-period figures look like.

A lender offering 75% LTV in bridging against a 90-day value on a property where the 90-day figure is 20% below the open market value is effectively offering around 60% of what the property is actually worth. Understanding which basis the percentage applies to is fundamental before modelling a deal.

For genuinely below-market-value purchases where you are buying at a meaningful discount, some bridging lenders will lend against the market value rather than the purchase price, subject to conditions. This is a small market of lenders and comes with specific requirements, including evidence of why the discount exists and sufficient skin in the game from the borrower.

Development Finance: Three Ratios, Not One

Development finance introduces three separate ratios that interact to determine the actual loan available.

Day one loan to value: What will the lender advance against the current value of the property in its existing condition?

Loan to GDV (Gross Development Value): What percentage of the completed project's value will they lend? A common figure is 65% loan to GDV. If the completed project is worth £100,000, the maximum loan is £65,000.

Loan to cost: What percentage of the total project cost (purchase price plus build costs) will the lender advance? A common figure is 80-85%. If the total project cost is £75,000, 80% of that is £60,000.

The actual loan is the lower of these constraints. In most cases, the loan-to-cost ratio is the limiting factor that reduces the headline loan-to-GDV figure in practice.

There is also the critical point about how the money flows. Development and refurbishment finance is drawn down in stages against completed work, verified by a monitoring surveyor. You need to fund the initial phase of work yourself before the first drawdown. This working capital requirement catches investors out regularly.

In addition to any deposit and stamp duty, investors need to budget for professional fees (arrangement fees, valuation fees, QS reports), and sufficient working capital to bridge the gap between starting work and receiving the first drawdown from the lender. Add it up and the cash requirement is nearly always higher than the initial modelling suggests.

Investment Valuations on HMOs and Blocks

HMOs in Article 4 areas and multi-unit blocks introduce the investment method of valuation. Here the lender will not necessarily lend against the comparable residential value of the bricks and mortar, but against a yield-based investment figure.

This is more favourable for the investor in theory. A well-run HMO can command a premium over its C3 residential equivalent precisely because of the planning constraint and the income it generates.

But lenders apply a cross-check. If the investment valuation produces a figure significantly above the local C3 residential value, the gap is too wide to be comfortable. Some lenders will soften the yield or adjust the figure down. The premium needs to be grounded in evidence.

There are early indications that some lenders are tightening their approach to investment valuations on HMOs, particularly at the lower end of the market where properties have been pushed into investment territory without quite enough justification. Investors who have modelled deals on optimistic investment valuations should stress test the numbers against a more conservative figure.

Common Mistakes

Comparing a pre-purchase desktop estimate with a formal mortgage valuation and expecting them to match. They may, but they can differ, and different valuers bring different professional judgements.

Assuming the lender's valuer and a different valuer will produce identical figures. They should be close, but switching valuers to try to get a better number is rarely the answer. The evidence base is the same.

Modelling development finance on the loan-to-GDV figure without accounting for the loan-to-cost constraint. The actual loan available is nearly always lower than the GDV percentage alone would suggest.

Not stress testing the valuation. What happens to the deal if the lender values the property at 10% below your expectation and reduces the LTV accordingly? Is the deal still viable? If it only works at the most optimistic valuation, the risk profile is much higher than it appears.

If you want to work through the numbers on a specific deal and understand what the lender will actually advance against the valuation they will instruct, get in touch via our contact form and we can work through it with you.