The 21-year-old, son of Bulgarian Football Union president Borislav Mihaylov, joined Liverpool in 2007 from Levski Sofia but has spent the last three seasons on loan at Twente.
"I didn't want to change club," he told Bulgaria's Darik Radio after signing a three-year deal with the Dutch club. "There was an offer from PSV Eindhoven but I'm glad Liverpool and Twente reached an agreement.
Twente are second in the league, on the same points as leaders PSV.
