Understanding Loan-to-Value (LTV) Ratios in Ireland

Buying a new home means that you must learn many new terms, and you will hear about loan-to-value as soon as you even begin your property search.

One of the factors that banks and mortgage lenders take into account in considering your mortgage application is your loan-to-value ratio. This represents the level of risk that the lenders are taking on by lending to you. 

Your LTV may affect your chances of mortgage approval so it’s a good idea to get to know what it’s all about.

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The loan-to-value is the ratio between the amount of the loan or mortgage and the value of the property purchased.

Basically the higher your loan-to-value ratio, the more of your prospective property will be funded by a mortgage or borrowing rather than by your own funds.

To calculate your loan-to-value, you will need to know the value of your intended property and the amount of the loan you will use to purchase the property.

To get your LTV, divide the property value by the mortgage amount and multiply by 100.

For example, if you purchase a property with a value of €250,000 with a loan of €200,000 then your LTV is 80% i.e. The amount of the loan is 80% of the value of the property.

In Ireland, the Central Bank has applied certain conditions and restrictions, called Mortgage Measures, on the loan-to-value ratio allowed when purchasing a property.

The measures are intended to maintain economic and financial stability and ensure lending sustainability in the mortgage market.

The Central Bank rules place limits on the amount of money that can be borrowed to purchase residential property.

Although banks can lend a certain amount above the limits in restricted circumstances, known as mortgage exceptions, generally lending is limited by your income and the loan-to-value limit.

The loan-to-income limit (LTI) means that you can only borrow 4 times your gross income for first-time buyers, and 3.5 times your income for second and subsequent buyers.

The loan-to-value limit requires you to have a minimum deposit before you can get a mortgage. 

First-time and second or subsequent property buyers of residential property must have a minimum deposit of 10%. This means that the maximum LTV allowed is 90%.

Buy-to-let purchasers must have a minimum deposit of 30%. This means that the maximum LTV is 70%.

As a general rule, if you have a lower LTV you will be more likely to be offered a more favourable mortgage interest rate.

Your mortgage interest rate will depend on several factors, such as your choice between a variable, fixed, or green mortgage, and whether you are a first time buyer, second or subsequent buyer, or a mortgage switcher.

Lenders provide information on their mortgage interest rates to give you an idea of the rate you may be offered.

Although several factors will be taken into account in determining whether your mortgage application will be approved, LTV has an effect on loan approval.

If you have a higher deposit, or a lower LTV, then you will in general be seen as a lower risk applicant and your loan is more likely to be approved.

There are limited exceptions, or exemptions, to Central bank lending rules. Every year, banks and mortgage lenders are allowed to lend a certain amount above the guidelines.

Lending above the limits is allowed depending on the type of buyer:

Exemptions can be made on the basis of loan-to-income (LTI) or loan-to-value (LTV) but not both.

Lenders also have different criteria around lending outside of Central Bank rules and how they use exemptions, such as the time of year they are available etc.

Switcher mortgages, where you take your existing mortgage to a new lender, and negative equity mortgages, where the value of your property is less than the balance of your mortgage, are also exempt from LTV limit rules.

These types of mortgages are for those who already own property and wish to switch to a new lender.

You will need to have a minimum deposit of 10% of the value of the property you intend to purchase. 

Beyond this figure, the more you can save for a deposit the better as you may be seen as a ‘lower risk’ applicant when it comes to securing your mortgage as higher LTV ratios represent a higher risk to the lender.

If you can manage to save a 20% deposit, and your LTV is 80% or lower, then you may be eligible for a lower mortgage rate and better terms.

If you wish to remortgage your property, this means that you wish to take out a new mortgage on your home and use this new loan to repay your existing mortgage, either at more favourable terms or to release equity in your home.

Borrowing additional money when remortgaging is known as releasing equity as you are, essentially, using the value of your home that you own as security to borrow a higher amount.

When remortgaging, you may borrow up to 90% in total of the value of your property.

If you wish to borrow at a lower loan-to-value, then you have several options.

Firstly, you could save more to pay a larger deposit, meaning that your mortgage will be for a lower proportion of the property value, i.e. you lower your LTV percentage.

Another option is to consider buying a more affordable property. This has two benefits as your LTV will be lower even though you have the same deposit, and you may also benefit from a lower mortgage rate.

If you already own a property and you renovate your property, or make alterations to lower the property’s BER, then you may also increase the value of your home. This may mean that your LTV is lower as the loan will be a lower proportion of the increased property value.

Unlike in the past, lenders no longer offer 100% mortgages. Under the Central Bank lending rules, you must have a minimum deposit of 10% of the property’s purchase price to buy residential property.

There are Government schemes to help first time and fresh start buyers with the necessary deposit, such as the Help to Buy scheme, and the First Home Scheme.

If you are gifted a deposit or land from a parent or relative, rather than loaned, then many lenders will accept this and use it in calculating your LTV when applying for a mortgage.

Switcher mortgages, where you take your existing mortgage to a new lender, and negative equity mortgages, where the value of your property is less than the balance of your mortgage, are also exempt from LTV limit rules.

These types of mortgages are for those who already own property and wish to switch to a new lender.

Understanding how loan-to-value ratios work is key to buying a home in Ireland. To see your options, get loads of information on home buying,and to get personalised advice, MortgageOne is your one stop shop.

We have an online mortgage approval system for rapid mortgage approval, and we also offer ongoing mortgage advice and application support. We can also help you with mortgage protection and home insurance.

Whether you are a first or second time buyer, remortgaging, or thinking or purchasing an investment property, we can guide you through your mortgage journey.