How do you calculate LTVs when remortgaging?
Because taking out a mortgage is such a serious financial step to take, it’s essential that you know exactly what you’re in for, exactly what the process entails and exactly what you can and can’t afford.
Loan to value (LTV) is the ratio of your mortgage to the property value and this ratio impacts the amount you will be able to borrow and the cost of that mortgage.
For example, if you have a high LTV ratio, you will be offered higher interest rates on mortgages, which means you’ll have bigger repayments to make each month.
How do you work out the LTV?
To calculate your LTV ratio, subtract the amount of deposit you have from the value of the house you want. Calculate the difference between the remaining value and the mortgage as a percentage.
For example, if you want to buy a house for £200,000 and you have a £20,000 deposit saved up, your LTV ratio would be 90 per cent.
The bigger your deposit, the lower the LTV will be – so aim to save up as much as you can before getting the process started.
Lenders often see lower LTVs as lower risk since it makes the loan more affordable, so you’ll increase your chances of being approved – even if you’re a first-time buyer.
How can you improve your LTV ratio?
There are various ways in which you can improve your LTV, including:
Building a bigger deposit
It may mean you have to wait longer to invest, but taking the time to save up for a bigger deposit will get you a better mortgage deal and mean you spend less overall.
Finding a cheaper house
To make it more affordable, perhaps consider finding a house with a lower asking price. This will mean your LTV will be lower.
Consider shared ownership
Another option to get onto the property ladder in a more affordable way is to consider a shared ownership scheme. Here, you only buy a share of the house and pay rent to a landlord on the remainder.
How do you calculate LTVs when remortgaging?
If you want to remortgage, it can be beneficial to work out your LTV before you do so, particularly if you think it’s likely to have improved since the last time. Your house value may well have increased and you may have carried out home improvements to drive the value up, as well.
To calculate this, see how much you still owe on the current mortgage, then divide this by the new value of the house and multiply this by 100 to get your LTV ratio percentage. The more equity the house has (the value of the property minus how much you owe on the mortgage), the lower the LTV will be.
Of course, this is only a quick guide and you may find you need further help or advice when it comes time to take out a mortgage. If so, get in touch with the BR Needham team today.