Unless you’re intending to purchase your property outright, you’ll need to arrange finance with a lender so that you can borrow the money you’ll need to secure the home of your dreams.
For most people, taking out a mortgage on their home will be the largest financial commitment that you’ll ever make and taking the first steps can be daunting.
What is LTV?
LTV stands for Loan To Value – a three letter acronym used in the mortgage industry which shows the percentage of the property’s value being purchased with a mortgage.
How do you calculate LTV?
The first thing for you to understand is how much of the property’s value you need to borrow. Lenders and advisers call this the Loan To Value (LTV) and usually express it as a percentage.
Firstly, subtract your deposit from the purchase price of the property to calculate the mortgage amount you need.
For example, if you’re buying a property for £200,000, and have £30,000 in savings to use as your deposit, you will need to borrow £170,000.
Next, divide the mortgage required by the purchase price and multiply the answer by 100.
Using the example above this would be:
170,000 divided by 200,000, multiplied by 100. This equals 85%, or put another way, you will need an 85% mortgage.
In the case of a remortgage, you can calculate the Loan To Value by dividing the mortgage remaining by the property value and multiplying the answer by 100.
Why is LTV important?
Lenders are all risk averse – the less risk, the happier they are. Should the worse-case scenario happen, and you can’t repay your mortgage, the lender can expect to repossess your home and sell it to recoup their money and any costs associated with the repossession.
This is a much larger risk if you have a high Loan To Value mortgage, with the possibility of your home losing value, as a sale might not recover all the money owed.
This can make lenders nervous about offering high Loan To Value mortgages and this is often reflected in higher interest rates available along with stricter criteria for the applicants or property.
Takeaway - the larger the deposit you can gather, the less risk you are seen to be by lenders.
What does having a lower LTV means to you?
Having a lower Loan To Value mortgage will allow you access to mortgage deals with lower interest rates, which means you’ll end up paying less for your property overall.
Mortgage products are usually offered in bands of 5%, whereby you may be eligible for a particular interest rate if your Loan To Value is, for example, over 80% but equal to or below 85%. Going over 85% by even a penny will push you into the 90% band of products, so keep this in mind if you are close to one of the many banded thresholds.
It can be a difficult choice between getting on the property ladder sooner rather than later with a high Loan To Value mortgage, or waiting until you have a larger deposit – by which time property prices may have risen.
Having a chat with a mortgage adviser can help solidify your options and will give you an indication of what mortgages are available to you based on the size of your deposit.
When will 95% LTV mortgages be available again?
95% mortgages were rapidly withdrawn from the market during the first COVID-19 lockdown. As restrictions are eased and economic certainty returns to the industry there are signs they will be reintroduced soon.
The government has announced it is working with UK lenders to reintroduce 95% mortgages from April 2021 with government backed schemes as part of plans to turn “generation rent” into “generation buy”.
What about 100% LTV Mortgages?
In the old days, pre-2008, 100% mortgages (where you could borrow the whole amount needed to pay for your new property) were common. You could even get a 125% mortgage under some circumstances!
The banking crisis of 2008 changed all that and the UK plunged into a recession. 100% mortgages, seen by many as irresponsible lending, became harder to find than unicorns.
Times change, and some niche lenders are once again offering 100% mortgage deals. But be warned, these mortgages require a guarantor either securing their home against your mortgage or using their savings as security. That means their home or savings are at risk if you don’t keep up your monthly repayments. Interest rates will generally be higher as well and there’s the very real risk of getting into negative equity (you owe more than your home is currently worth).
How can we help?
Contact us to speak to our friendly team and book your free, no obligation, mortgage consultation with a mortgage broker from our Portsmouth Technopole office. You can rely on our expert support every step of the way to make the whole process as simple, hassle-free, and straight forward as possible.