This episode in our First Time Buyer Series is about Loan-to-Value (LTV) and how it can really change your mortgage…
What is loan to value?
One of the aims of The Mortgage Mum Podcast is to demystify mortgages, to make it easier for you to understand what you need to do and what you need to be aware of when you’re buying a property. LTV is one of those subjects a broker talks about all the time, but really, it’s one of those things that unless you understand what it means, it can probably throw you out a little bit!
LTV stands for Loan to Value, but what does that mean in real life terms? It means how much you’re borrowing versus how much the house is worth.
If a property is worth £200,000 and you’re putting down a 10% deposit, then your LTV will be 90% because you are borrowing 90% of the property’s value.
What are the LTV bandings?
Why do we talk about LTV so much as mortgage brokers?
It’s all about the rate. The lower your LTV, the lower your mortgage rate. We tend to refer to bandings of 5% and 10%, in terms of LTV rates.
For example, if you put down a 10% deposit you will get better rates than someone who’s put down a 5% deposit. If you put down a 15% deposit, you’re going to get better rates than those who put down a 10% deposit. You can put down a 12% deposit if you want to, or you could put down 8%, but you’re going to come into a banding and it works in 5% intervals.
When you do reach 60% LTV, that is typically where that stops. Therefore, a rate for someone with 40% LTV will be probably the same as somebody at 60% LTV – yet the FCA gives us brokers a responsibility to get your mortgage paid off as quickly as possible.
However, we do have more of an open mind here because money invested in other things can make you more money, therefore you might be better off to take equity out of your property and invest in more properties, and if you listened to our recent Buy-To-Let episode with Shelley Walker, there’s some really interesting points about that and how you can use your properties to get you more properties, to leverage your mortgage borrowing to get yourself a portfolio of properties. Give that episode a listen if you’re somebody that’s thinking of investing, even if you’re a first time buyer there are options for you to invest before you get yourself a residential home (but it does work a bit differently).
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Why are the rates higher for a higher LTV?
This is all about the risk in explaining why the rates are better, because the lender has less risk.
The more deposit that’s in the property, the less risk there is and that’s because if the property value goes down, there’s a little bit more room for that to happen without it affecting the mortgage and what the lender is actually giving you the money on.
That’s why we talk about LTVs and why it’s so important to remember it’s worth thinking about.
For example, if you have a 12% deposit, is it better for you to put down 10% and use that additional 2% for something else? It might be – because that additional 2% is not going to get you a better rate, so it’s work considering your options because it can make a big difference. That 2% could allow you to do those home renovations that might increase the value of your property more than if it sat in your mortgage…
Knowledge is power
The more you know, the more you’ll understand, and the more power you’re going to have in making better decisions. That’s what The Mortgage Mum Podcast is all about – giving you back the power that for too long, brokers perhaps didn’t hold that power in the best way.
We are about sharing our knowledge with you and making sure that you understand your mortgage. That way, you’re in control and you can make the best decisions for you and your family.
Let me know on social media or on our online contact form how this episode has landed for you and if you’ve learned something new.
