When you apply for a mortgage, you’ll normally have a deposit saved up to put towards the cost of buying your home.
Typically, it needs to be at least 10% of the value of the property, but it can sometimes be more. The more you’ve saved up the better – it makes sense to put as much as you can towards your new home – whether that’s 20%, 30% or 40% of the purchase price. After all, the less you borrow, the lower your repayments will be.
With the Help to Buy scheme, you might be able to apply for a mortgage with a deposit of as little as 5% if you’re a first time buyer. You can find out more about how this works here.
Loan-to-value simply means how much you have to borrow for your mortgage against how much the property is worth. For example, if you are able to put down a deposit of 10%, the mortgages you’ll be looking for will have a loan-to-value (LTV) of 90%.
The importance of loan-to-value
Having a low LTV means you’ll usually be offered better rates on your mortgage, as the most attractive interest rates are usually reserved for those with a higher deposit.
If you’re looking to remortgage, your LTV is still just as important. The amount of cash you’ve put into your home – say in the deposit or the cash you’ve paid off on your mortgage so far – is known as equity. You should be able to enjoy some of the best remortgage rates if you have a LTV of 60% or less, so that means having equity in your home of at least 40%.
As you pay off your mortgage, your equity should steadily increase while your LTV decreases each month, but this may not always be the case. If, for example, your home drops in value while you’re living there, then the amount of equity in your home will fall as well, while your LTV will increase. On the other hand, if your home’s value increases, your equity will rise and your LTV will fall. You can use this house price calculator from Zoopla to get a rough estimate of how much your home is worth.
Finding a better deal
Should you find that your home has increased in value since taking out your existing mortgage, or that it has stayed the same but you have paid off a chunk of your mortgage and you’ve therefore got more equity, it might be time to scout out a better mortgage deal.
To work out your new LTV, you’ll usually have to wait for your new lender’s surveyor to value the property unless you have paid for it to be valued yourself. After this, you can divide your outstanding mortgage balance by the value of your property – then times this by 100 to work it out as a percentage.
If the sums have left you confused, check out this example – if your mortgage balance is now £100,000 and the value of the property is £150,000, the balance divided by the value is 0.66. Once multiplied by 100, you get a LTV of 66%.
If your fixed rate or discounted mortgage deal is coming to an end, your existing lender may just put you on its standard variable rate, which isn’t usually very competitive. Before your deal comes to an end, it’s a good idea to speak to your lender first and see if they have any deals for loyal customers looking to remortgage. If not, it might be worth speaking to a broker like Ocean to find you a suitable remortgage deal for your level of equity. If you suffer from a bad credit history, why not read more about our bad credit remortgages.
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