If you can obtain an 85% LTV mortgage, where you provide a deposit or home equity of 15%, you will usually be rewarded with a much lower interest rate than a 90% LTV mortgage – which can save you thousands of pounds in interest repayments over a few years.
It’s where you need to borrow 85% of the cost of the property that you want to buy. The other 15% has to be provided by you, either in the form of a deposit or home equity if you’re moving home or remortgaging.
For example, if you’d like to buy a home valued at £450,000 with an 85% LTV mortgage, you’d need a deposit of £67,500 – quite a hefty chunk of change. The remaining £382,500 would be lent to you by your mortgage lender.
Now read: What is LTV or loan to value?
Accruing a deposit of 15% as a first-time buyer certainly isn’t easy if you live in an expensive part of the UK – but if you can manage it, you’ll be rewarded with mortgage products with preferential interest rates compared to 90 and 95% LTV mortgages.
For example, the best two-year fixed rate 85% LTV mortgages currently offer a promotional interest rate of around 1.8%. With an LTV of 95%, the best rates are more like 2.8%. On a mortgage of £250,000, that 1% lower interest rate equates to a saving of over £3,500 in interest repayments over two years.
If you’ve built up some positive equity in your current property, and you’d like to move to a new home, save money, or need to borrow money for home improvements, then an 85% LTV mortgage could be a good solution for you.
If you’re moving to a new property, you’ll need a deposit, home equity, or a combination of the two, totalling 15% of the new property’s purchase price. For example, if your current home is valued at £500,000, and owe £400,000 on your mortgage, you have a positive equity of £100,000 – which could then be used to secure an 85% LTV mortgage on a property valued at £660,000.
Alternatively, you could stay where you are and use the positive equity to get a new mortgage at 80% LTV and enjoy a lower interest rate – or you could remortgage to borrow more money from the bank, which you could then spend on renovations or other home improvements.
If you’d like to find out how much equity you have in your current property, you can usually find out how much you owe your mortgage provider by looking at your most recent statement – or alternatively, just phone them up and ask. You can find out the rough value of your home by doing some research online – or ask an estate agent for a valuation.
Last updated: 28 January, 2019
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