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Loan to Income vs Loan to Value: What does it all mean?

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Loan to income and loan to value (or LTV) are phrases you often hear in the mortgage industry…

๐Ÿ˜ฏ The two terms are easy to mix up, understandably, but they are very different. Itโ€™s important to know the difference because both loan to income and loan to value are key factors used to determine how much you can borrow for a mortgage.

๐Ÿก Recently, thereโ€™s been a surge in lenders offering 95% LTV products aka mortgages you only need a 5% deposit for. Loan to value means the amount of the house price the bank is going to provide, so a 95% LTV means the bank is forking out 95% of the money needed to buy the property. However, many buyers are finding that even though 95% LTV (5% deposit) mortgages are available, they canโ€™t take advantage of them. This is because of the all-important, loan to income multiple.

๐Ÿ’ฐ A loan to income multiple is where the bank takes your householdโ€™s income and multiplies it by a certain amount to work out how much theyโ€™re willing to lend to you. At the moment, a common multiple being used is 4.49, although this varies depending on several factors and across different lenders so talk to your adviser for more information. As an example of how income multiples work, say you and your partner are buying a property together and you both earn ยฃ25,000 each. If you used a lender offering a 4.49 loan to income multiple, the most they would lend you is ยฃ224,500.

๐Ÿ˜ณ This is where the difficulty can occur: if you want to buy a property for ยฃ249,000 (which was the average UK house price in January 2021), a 5% deposit would be ยฃ12,450. However, say youโ€™re the couple earning ยฃ25,000 each from before and the bank will only lend you ยฃ224,500. As a result, between the bankโ€™s loan and your deposit, youโ€™ve only got ยฃ236,950 in total. Youโ€™re missing ยฃ12,050. See the problem now? That extra ยฃ12,050 is money that you would have to save up and pay as part of your deposit, meaning that your 5% deposit becomes a 10% deposit and you wonโ€™t be using a 95% LTV product.

๐Ÿก Obviously, property prices vary depending on location, size and type: a three bed house costs more than a one bed at… unless the house is in Middlesborough and the flat is in Chelsea. Similarly, income varies depending on location, profession, age etc.

โ˜Ž๏ธ So, although you now know what loan to income multiple and loan to value mean, itโ€™s still worth speaking to your adviser about how they will impact you specifically.

๐Ÿ“ž If youโ€™d like to discuss the options available to you, contact your adviser today.

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Source: Mortgage Intelligence