Jargon Decoded: LTV, yield and stress testing, in plain English

Property finance uses a lot of shorthand, and the shorthand does a good deal of work in making the whole thing sound more complicated than it is. Three terms decide most buy-to-let decisions. Here they are without the mystique.

Loan to value, or LTV, is simply what proportion of a property's value you have borrowed. Borrow £150,000 against a property worth £200,000 and your LTV is 75%. That is the whole concept.

It matters because it sets two things at once: how much of your own money you get to take back out, and how exposed you are. A higher LTV releases more cash but costs more every month and leaves less room if rates rise or the property sits empty. Lenders price for this, so rates usually step up as LTV climbs.

Yield is the annual rent expressed as a percentage of what the property cost. £14,000 of rent on a £200,000 property is a 7% gross yield.

The word doing the heavy lifting there is gross. Gross yield ignores the mortgage, management fees, insurance, maintenance, and the weeks the property is empty between tenants. It is a useful way to compare properties quickly. It is not what ends up in your account, and a strong gross yield can still become a negative monthly position once finance costs are included.

There is a second distinction worth knowing: yield on value versus yield on cost. Yield on value uses what the property is worth now. Yield on cost uses everything you actually spent — purchase, refurbishment, stamp duty, fees. On a refurbishment project these give quite different answers, and yield on cost is the more honest one, because it is measured against money you genuinely parted with.

Stress testing means checking whether a deal still works when conditions are worse than you expect. Lenders do this as a matter of course: they will assess your mortgage at a rate well above the one you are actually being offered, to satisfy themselves the rent still covers it with room to spare.

We stress harder than the lender does, on two fronts. We test the deal at an interest rate meaningfully above what we expect to pay, and we test it at an end valuation below the one we are forecasting. If it survives both, it is a deal. If it only works on the optimistic version of both, it was never really a deal — it was a hope with a spreadsheet attached.

None of this is investment advice, and any specific decision needs proper professional input on your own circumstances. But these three terms cover most of what is actually being asked when someone says a deal does or does not stack up.