what is loan to value?
what is loan to value?
The percentage size of your Mortgage in relation to your home’s value. For example, a Mortgage of £90,000 and a property valuation of £100,000 is 90% loan to value (LTV). The £10,000 that is missing from the above would be your deposit, or equity (10%). Therefore, the greater the equity or deposit the lower the LTV is, which is more desirable to Mortgage Lenders.
what does Loan to value affect?
The lower the LTV is, the lower the interest rate you will be eligible for. Therefore, the overall cost of your Mortgage will also be lower.
So if you are only putting down a 5% deposit (95% LTV) on the purchase of your new home. The Mortgage you will be eligible for, will be more expensive than if you were to put down a 15% deposit (85% LTV).
what loan to value can i borrow up to?
For a residential Mortgage, providing you have a reasonably good credit history. You will be able to borrow up to 95% LTV. This means you will need a 5% deposit. This could be from your own Savings, or a Gift from a parent for a example.
You will have seen some adverts claiming that you are able to go up to 100% LTV, meaning you don’t have to put down a deposit. These aren’t what we would consider as truly 100% LTV Mortgages. This is because all would require some form of collateral from a parent for example. This is usually in the form of a parent depositing 10% of the property value into a savings account with the lender. This will be locked there for a set period of time, usually around 3 years.
For a Buy to Let Mortgage, you will be able to borrow up 80% LTV (in some cases up to 85%).
what is a good loan to value?
For residential Mortgages, anything less than 85% LTV is classified as lower risk to Mortgage Lenders. Anything over 85% LTV is classified as a high LTV and is considered as higher risk Mortgage Lending.
why is a high loan to value higher risk for mortgage lenders?
Simply put, if Mortgage Lenders ever need to repossess your property, due to you missing multiple repayments on your Mortgage for example. They’ll have a better chance in getting all their money back, the greater the equity in your property. Mortgage Lenders will often sell repossessed properties via auction, to recoup the Mortgage and costs as soon as possible. Properties sold via auction will often go for much less than the actual market value. Therefore, the lower the LTV, the greater chance the Mortgage lender has of recouping the outstanding Mortgage.
In addition, the lower the deposit, the greater the chances are of you falling into negative equity.
negative equity and the dangers of it
Negative equity is when the value of your property is less than your Mortgage. An example of this would be, you purchase a property for £150,000 and take out a Mortgage for £135,000 (90% LTV). Two years on property prices have fallen, and your home is now valued at £125,000 and you have an outstanding Mortgage of £130,000 (more than 100% LTV).
There are a number of risks associated with this, such as you becoming a Mortgage Prisoner. This is where you are unable to Remortgage or move onto a new fixed deal with your existing lender.
When you first obtain a Mortgage, Lenders will offer you a Fixed Rate deal when you join them for an initial period, usually between 2-5 years (some offer longer). After the 2-5 year initial fixed period, you will automatically roll onto the Lenders Standard Variable Rate. More times than not, this will be more expensive and generally fluctuates with the Bank of England Base rate.
If you are in a negative equity position, Mortgage Lenders (existing or otherwise), are generally not going to offer you another fixed rate option. This will leave you stuck on higher repayments and at the mercy of interest rate fluctuations, until you are able to reduce your LTV to below 95%. This will happen either by the value of your home increasing, by making payments off your Mortgage or a combination of the two.
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