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How does loan-to-value work on a remortgage?
When you first take out a mortgage to buy a property, you’ll have a deposit saved up to put towards the cost of the house. For a lot of first-time buyers, this will be 10% of the house price but some buyers put down as much as 40% as a deposit.
The amount you put lets you work out your loan-to-value (LTV) – with a 10% deposit, you’ll be looking at a mortgage with a LTV of 90%. The more you put down as a deposit, the lower your LTV will be and the better mortgage interest rates you may qualify for.
That’s relatively easy to work out but how do you know what your LTV will be if you’re looking at remortgaging? You’ll need to know how much equity is in your home, so let’s take a look at how you can calculate this.
Working out your equity
If you have got a repayment mortgage then every time you make a monthly payment you repay some of what you owe – so the equity in your house should be increasing. Whether or not it is depends on the value of your property. If it is rising then so is your equity, if it falls then your equity falls too. Equity is simply the difference between how much capital you’ve still got to pay off on your mortgage and how much your house is currently worth.
For example, if you took out a repayment mortgage for £80,000 and you’ve been paying it off for a few years, you might only have £70,000 left to pay. Say your property was worth £100,000 when you bought it but its current value is £110,000. Combining that with how much you’ve paid off of the mortgage, that means you’ve currently got a £70,000 mortgage on a property worth £110,000 giving you £40,000 of equity.
Working this out as a percentage, you’ve got a LTV of just under 64%. Generally better mortgage deals are available for people with LTVs better than 80% or 60% – so 64% should put you in a good position when you speak to lenders.
You can get a rough estimate of how much your property is worth at current market value using this house price calculator from Zoopla. If it’s gone up in value, you might be able to get a better deal on your mortgage by switching.
A good place to start is with your current mortgage lender to see what deals it is currently offering, as it might have exclusive deals for loyal customers. You should also see what rates are available from other high street lenders, but it also makes sense to speak to a broker such as Ocean. Brokers often have access to mortgage products that that aren’t available on the high street.
If you have built up equity in your property you could look at release some of it when you remortgage – perhaps to fund home improvements or an extension. Releasing equity just means taking a bigger mortgage than you need to pay off the existing mortgage, giving you access to the extra cash. Bear in mind if you are thinking of this that you will be increasing the size of your mortgage and possibly the monthly payment too. You should think carefully about whether you can afford any change in your mortgage payments, as failure to pay your mortgage could result in your home being repossessed.