If you have a 15% deposit or have built up 15% of equity in your home, you can apply for an 85% LTV (loan to value) mortgage. Find out more about 85% LTV mortgages and compare our best deals in our guide below.
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An 85% LTV (loan to value) mortgage requires you to borrow 85% of the cost of the property that you want to buy. The remaining 15% has to be provided either in the form of a deposit, or through existing home equity if you’re moving home or remortgaging.
For example, if you’d like to buy a home valued at £400,000 with an 85% LTV mortgage, you’d need a deposit of £60,000 – quite a hefty chunk of change. The remaining £340,000 would be lent to you by your mortgage lender.
If you can obtain an 85% LTV mortgage, you will usually be offered a much lower interest rate than those needing a 90% or 95% LTV mortgage.
When you consider this is a loan that you will have for 25 years or more, even a tiny reduction in interest rate can shave thousands of pounds off your total interest paid over the duration of the loan.
Accruing a deposit of 15% as a first-time buyer certainly isn’t easy, particularly if you have quite high outgoings or live in an expensive part of the UK. But the good news is, 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 2-year fixed rate 85% LTV mortgages currently offer promotional interest rates of around 2%, whereas with an LTV of 95%, the best rates are more like 2.7%.
If it’s possible to save for a larger deposit, this will mean you need to borrow less. Therefore, you’ll be paying less interest on that home loan, too. It’s a win-win.
So, what if you are already a homeowner and would like to take advantage of a better mortgage deal?
If you’ve built up some positive equity in your current property and would like to move home, save money, or borrow money for home improvements, then remortgaging to an 85% LTV deal 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 you owe £400,000 on your mortgage, good news: you have a positive equity of £100,000. This could then be used to secure an 85% LTV mortgage on a property valued at £660,000. Assuming you have the income to support this commitment.
Alternatively, you could stay where you are and use the positive equity to get a new mortgage at 80% LTV and enjoy an even 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 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.
The best 85% mortgage deal is the option which costs you the lowest total amount, rather than simply looking at the lowest initial rate. After the initial term expires, the mortgage will return to the standard variable rate unless you remortgage. For this reason, pay attention to the overall cost for comparison.
It is important to also factor in any fees that are attached to the mortgage deal when working out which option is the best deal for you.
Be warned that while some lenders may offer temptingly low mortgage deals, when you scratch beneath the surface you find you will need to pay legal, valuation or administration costs that can add up to thousands.
Always find out what fees you will be charged in advance. Use the Annual Percentage Rate of Charge (APRC) to compare products as this incorporates some mortgage-related fees in its calculation.
If the best deal for you does involve fees, lenders will typically add this cost to the mortgage – meaning you could be paying interest on this money for the duration of your home loan. If you can afford to, consider asking your lender if you can pay this upfront.
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Last updated: 4 February, 2021