What does LTV mean?
L.T.V is an abbreviation of the term ‘Loan To Value’. Put simply LTV is the value of the loan you require as a percentage of the value of the property you want to purchase. Keep reading as we run through a scenario explaining LTV with an example.
What is an 85% LTV mortgage?
An 85% LTV mortgage is where a lender is willing to lend you 85% of the value of the property you want to purchase. To calculate 85% of the value of the property you can use this simple calculation.
Current value of the property divided by 100 [x 85]
Or once again with an example but with real numbers
Property value is £100,000 so divide 100,000 by 100. Then times that answer by 85.
The answer is 85,000.
In the scenario above, the property value is 100k meaning the mortgage required would be £85,000.
OK, so who makes up the rest of the money…?
Remember that whilst the lender is willing to lend 85% of the value of the property to you, this means the remaining 15% is required by you. With an 85% LTV mortgage you are required to have 15% of the value of the property as a deposit.
Hopefully that’s helped explain to you what an 85% LTV mortgage is and that a 15% deposit is required.
Is a 15% deposit good or bad?
Relax. A 15% deposit is a good enough sized deposit so that nearly ALL lenders will lend you the rest of the money needed to buy the property!
Why do people get so hung up so deposit amounts?
How much deposit is best for a mortgage?
So here’s the thing, typically the more deposit you have the better interest rate you tend to get from the bank or building society [or whoever is lending you the money for the property.] But wait around till you have a larger deposit and you risk the property going up in value and being more expensive to buy. If the property goes up in value, you now require a larger deposit anyway.
On the flip side, properties may have gone down in value whilst you were saving up a larger deposit, making them cheaper to buy…
Playing the property market comes with risks, so really it all comes down to how badly you want to buy your home in the first place and only you can answer that one!
Best 85% LTV Mortgages
How much LTV do I have?
If you already own a property and you have been paying off the mortgage then chances are you have built up some equity. Equity is the difference between the amount you owe the lender (i.e your total mortgage amount) and the value of your property. So for example:
If you owe £200,000 on your current mortgage and your property is worth £260,000 you have £60,000 equity in your home. Nice going!
But how do you calculate that ‘equity’ in terms of LTV?
Easy…
Using the above scenario as an example, 200,000 divided by 260,000 then times that answer by 100.
The answer the 77. So therefore you have a 77% LTV.
Remortgaging to an 85% LTV mortgage
You could get a much better deal re-mortgaging to a 85% LTV mortgage. Usually this means your payments will be lower each month as you could now have a better interest rate.
So if you have 15% or more equity in your home you could remortgage to an 85% LTV mortgage. That could free up some cash to do things like building an extension, or get a new kitchen or bathroom. Improving things in your home could add significant value to it.
What are the risks of an 85% LTV mortgage?
Lenders employ a ton of risk analysts and it’s their job to work out who is going to default on a loan. A default is where someone can’t pay back the loan, they may have lost their job for instance. So the risk of an 85% LTV mortgage is really the same as any other loan, it’s a worry that you won’t be able to pay it back.
The good news is at 85% LTV mortgage or in other words having a 15% deposit isn’t seen as risky when compared to say a 90 or 95% LTV mortgage.
We covered the risk to the lender but are there any risks for the person taking out an 85% LTV mortgage? A few yes.
The biggest one is something called negative equity. This is where the value of your home falls and you owe more on a mortgage than the value of your house.
How can you avoid negative equity?
One easy tip is to pay down your mortgage as fast as you can. Seems obvious, but what most people don’t realise is they can make mortgage ‘overpayments’ usually up to 10% per year on top of your regular mortgage payments to help bring down the amount you owe.
This could mean over time you will pay less interest back to the bank and build up equity in your home faster than you would have otherwise. It could be a real win win.
85% LTV Buy To Let Mortgages
Yes such a thing does exist but an 85% LTV buy to let mortgage is the highest LTV you are likely to find.
There aren’t many lenders who offer this LTV mortgages for Buy to Lets and interest rates tend to be high. With that said, it’s still totally doable to find a mortgage lender for an 85% LTV BTL (Buy To Let).