Deposit and loan to value, explained

What loan to value means

Loan to value is the mortgage as a percentage of what the property is worth. Borrow £180,000 on a £200,000 house and your loan to value is 90%. That is it - but it is the single most important number in mortgage pricing, because it measures the lender's risk. If they have to repossess and sell, a bigger cushion means they get their money back.

Rates move in steps, not smoothly

This is the part that catches people out. Lenders do not price loan to value on a gentle slope. They price it in bands, and the price jumps at the boundary. Being at 90.4% and being at 89.9% are almost identical amounts of risk, and completely different products.

The bands most lenders use:

Should you wait and save more?

The honest answer is that it depends on three things, and anyone who gives you a rule is selling something.

• How close you are to a band. Two months of saving to cross from 91% to 89% is almost always worth it. Two years of saving to get from 90% to 85% while paying rent usually is not.
• What you are paying to wait. Rent is the real cost of saving. If you pay £1,200 a month in rent, a year of waiting costs £14,400 to save perhaps £8,000.
• Whether prices are moving. Nobody knows. Do not build a plan on a forecast, including ours.

Our general position: get to 10% if you can, because the jump from 95% to 90% is the biggest single improvement in the whole scale. Beyond that, buy when it suits your life, and use overpayments to bring the loan to value down for your next remortgage instead.

Loan to value keeps working after you buy

Every capital repayment lowers your loan to value, and so does any rise in the property's value. Somebody who bought at 90% five years ago is very often at 75% or better today without having done anything deliberate - which puts them in a materially cheaper rate tier at remortgage.

This is why we always check the valuation at remortgage rather than accepting the lender's automated estimate. If you have improved the property, or the automated model is simply out of date for your street, a successful challenge that moves you across a band is worth more than everything else in the review.

Where deposits come from

Savings, a gift from close family, a Lifetime ISA, equity from a property you are selling, an inheritance or a divorce settlement. All fine, all needing evidence. A loan from family is a different thing entirely and must be declared, because it is a commitment that affects affordability.

What causes problems is unexplained cash, money arriving from overseas without a paper trail, or a lump sum that appeared last week. Raise it with us early. There is nearly always a way to evidence a legitimate source, but not on the morning of exchange.