So, you have a mortgage and your tracker deal or fixed rate is about to finish.
You want to look at what mortgage deals are out there so you can remortgage, but you need to know your current LTV. Look no further…
What is an LTV?
LTV stands for loan-to-value, and it’s usually expressed as a percentage. This shows what ratio of your home you own and what percentage belongs to the mortgage provider.
"If your home has gone up or down in value, this will also affect your LTV."
For example, if you buy a home for £100,000 with a deposit of £20,000 and a mortgage of £80,000, your LTV is 80%. This is because 80% of the property value has been borrowed from a mortgage provider and 20% has been provided as a cash deposit.
Over the years as you make your mortgage payments, the percentage of the property you own will grow. This is known as your equity.
So, if you’ve been making mortgage payments for a while, the amount you owe your mortgage provider may have come down to £60,000. This means you own £40,000 of the property’s value – the £20k you’ve paid off your mortgage and your £20k deposit – giving you an LTV of 60%.
And if your home has gone up or down in value, this will also affect your LTV, as you’ll find out below.
What is remortgaging?
When you first agree your mortgage, you’re likely to have signed up to a deal with a limited term. For example, you may have chosen a fixed or variable rate for a certain number of years – usually between two and five, although some fixed-rates can be as long as ten years.
Once the term on this deal has come to an end, you can remortgage to avoid going on to your lender’s SVR, which usually has a higher interest rate than a fixed or variable deal.
Why is this important?
As we mentioned, SVRs can be expensive. Remortgaging once your current deal comes to an end could save you money.
Knowing your LTV can help you narrow down the list of deals on the market that are open to you. It’s often the case that the smaller your LTV (anything below 60%), the better the deal you’ll get as you have a bigger chunk of equity.
How to work out the LTV when remortgaging
To work out your current LTV, you need to find out how much of your mortgage you have paid back. This should show up on your mortgage statement or your mortgage provider will be able to tell you. You can also check your credit history to see.
For example, if you originally paid £200,000 for a house with a deposit of £40,000, you’ll have had a mortgage of £160,000, giving you an LTV of 80%.
After five years, if you’ve paid back £30,000 of the original mortgage, your equity will be £70,000 = £40,000 deposit + £30,000 paid back.
£70,000 (equity) divided by £200,000 (property value) = 0.35
0.35 x 100 = 35%
You now own 35% of your property and your LTV is 65% - more competitive than when you first took out your mortgage.
How to work out the LTV when my property value has changed
This is where things get a little more complicated…
If the value of your property has increased
This is good news, as it should give you a greater chunk of equity. But how do you work out your new LTV?
Let’s stick with the same example, but say your property has increased in value from £200,000 to £250,000. This gives you £50,000 more equity in your home.
Your new equity is £120,000 but you still owe £130,000 on your mortgage.
You can now use the same calculation as above, but with the new figures
£120,000 (equity) divided by £250,000 (property value) = 0.48
0.48 x 100 = 48%
You now own 48% of your house and the mortgage provider owns 52%.
So, your new LTV is 52%.
If the value of your property has decreased
If, unfortunately, your property value has fallen, what should you do when it’s time to remortgage? Well, find out your LTV and you at least know what deals are available to you.
Sticking again with the same example, you bought your home for £200,000 but five years later the value of the property has fallen to £170,000. This means your equity will have reduced, so what’s the LTV?
As the value of the property has dropped by £30,000, your equity will also have fallen. As you still owe the mortgage provider £130,000, your share in the equity is £40,000.
£40,000 (equity) divided by £170,000 (property value) = 0.23
0.24 x 100 = 24%
You now own 24% of the property and the mortgage provider owns 76%. This gives you a new LTV of 76% - similar to the LTV when you first bought the property five years ago.
It’s normal to feel disappointed if your property has lost value. But providing you’re not in negative equity, you may still be able to find the right remortgage deal for you.