When it comes to buying a house, aspirational planning can help save you thousands of pounds over the life of the mortgage.
Whether you’re looking to buy your first house or looking to move to a new home, first understanding the loan to value ratio (LTV) can help you to get the best possible interest rate.
Loan to value ratio
When it comes to buying a new house, an important consideration for lenders is the amount of money you have available for a deposit. The loan to value (LTV) ratio is a simple calculation to determine the amount of money you’re looking to put down (your deposit) vs. the amount you’re looking to borrow (the mortgage).
Simply, the greater the deposit, the likelihood you’ll secure a better interest rate on the mortgage.
If you’re a homeowner already, you’ll need a minimum of 5% deposit (95% LTV) to move into a new home. With the average property price being £226, 906 this would be a deposit of £11,345.30. First time buyers will have some options for 100% mortgages, however the interest rates and terms can be more stringent.
As a rule of thumb, the brackets for the LTV ratio is considered as follows:
100- 85% is considered a high LTV- average interest rates up to November 2018 for 95% mortgages was 3.23%*
80-70% is considered a mid-range LTV- average interest rates up to November 2018 for 75% mortgages was 1.74%
65-60% is considered a low LTV and will offer you the best mortgage rates available to market.
*stats were picked from the Mortgage Finance Gazette
To work out your LTV, first work out how much you need to borrow
To do this, you simply subtract the amount you have as a deposit from the value of the property you are looking to buy. This gives you, the amount you need to borrow.
For example, if you have a £30,000 deposit; the value of the house is £226,906 which means you need a mortgage for £196,906.
Once you know the amount you’re looking to borrow, divide that over the value of the property x 100, and this gives you your LTV ratio. Using the sums above, this would be £196,906 divided by £226,906 x 100 = 87% LTV
With an idea of the LTV with things as they stand, you may decide to save up for a few years so that you can save for a larger deposit and achieve a better interest rate, and ultimately lower monthly repayments. Bear in mind though, as highlighted above, that LTV rates only change at certain thresholds, e.g. every 5%- 10%, so it probably isn’t worth throwing all of your money at your deposit if it’s not going to get you a more competitive interest rate.
Research what is available
To get a very basic idea of the kind of mortgage you could be offered, it is worth looking at a mortgage calculator to get a quick overview of the products available based on your LTV.
However, when it comes to applying, the amount of deposit vs. the amount you’re looking to borrow isn’t the single determinant when it comes to the interest rates that you’ll be offered. Personal circumstances will also be a prominent factor.
Reviewing your credit rating
Run a credit check on yourself
Additionally, it is also worth reviewing your credit history to see if there is anything hidden or any prevailing issues that may flag up to a mortgage provider. Running a credit report on yourself can provide valuable insight into the state of your finances and help you to address any issues or concerns before applying for a mortgage. You’ll also see which credit applications were processed through which addresses so you can be transparent in your application. Once you proceed with a mortgage application, they will request this themselves and if you’re familiar with what they’re looking at, you can be transparent about previous addresses, issues etc. in advance which helps to ensure a smoother process when it comes to applying for your mortgage loan.
Paying any outstanding debt before pursuing a mortgage, or showing a commitment to do so, will be attractive to any mortgage provider. Ultimately, the fewer commitments you have, the lesser the risk you’ll default on your mortgage. Therefore, reviewing your spending habits can also help you to achieve a better mortgage rate.
Your existing obligations; loans, car repayments, credit cards, store cards and dependents will be a major consideration for any lender. These are all things that affect your disposable income and therefore your ability to meet your mortgage repayments; as does your food, travel and utility expenses.
This is just a really simple overview of what some mortgage lenders will consider when you apply for a mortgage. Our tips are provided just for a little insight. We’re not financial experts and recommend that you seek financial advice from a mortgage broker or even your bank manager to get a better indicator on what may be available to you based on your personal circumstances. This article is a collation of our research and personal experience.
We’ve shared some of our other money matters features below which provides our tips on savings accounts, saving money on everyday purchases and ways in which you can better manage your personal accounts. Over the next few money matters features, we’ll also show you how to determine your house value, help you to negotiate the price of purchasing a new home and when it comes to moving, how much equity, and therefore deposit, you have in a property.