95% loan-to-value (LTV) mortgages are most popular with first-time buyers because they only require a 5% deposit. As the deposit is comparatively small, you can reach your savings target (and so get onto the property ladder) that much sooner. They are also available to those remortgaging or moving house.
LTV stands for loan-to-value, which relates to the ratio between how much money you need to borrow to buy a property vs. how much it is worth.
So, a 95% LTV mortgage is where you stump up 5% of the property’s value and borrow the remaining 95%. If you’re buying your first home, the 5% will be in the form of a deposit – a cold, hard chunk of cash, most likely from your savings. If you’re remortgaging or moving house, you can use the equity you have in your property as a deposit.
For example, if you wanted to buy a £300,000 property, you would need to contribute a deposit (or equity) of £15,000 (5%) for an LTV of 95%. Any less than that, and you would struggle to find a mortgage, although there are some 100% LTV mortgages available.
If you’re a first-time buyer, you may only be able to raise a deposit of 5% – especially if you want to buy in an expensive part of the UK. The interest rates on 95% LTV mortgages might not be as good as 90 and 85%, but competition between lenders is strong enough to keep the rates relatively steadily around the 2.55% mark.
Another option is to use one of the government’s Help To Buy schemes – often only available to first-time buyers. The Shared Ownership scheme lets you buy a 25 to 75% share of the property to begin with – and then potentially scale up your ownership over time (which you do at the market value at the time, not from the time you first bought it). As you are only buying a portion of the property, you can raise a smaller deposit towards your mortgage.
To be clear, if you have enough money for a bigger deposit, then use it – do not aim simply for a 95% LTV mortgage. The bigger the deposit (or equity), the lower the LTV and the better the rates.
If you have a positive equity in your current home – that is, if your home is worth more than what remains of your mortgage – you can use that equity as a deposit for a remortgage in your current property, or a new mortgage for moving house.
For example, if your current property is valued at £300,000, and you owe £250,000 on your mortgage, you have £50,000 equity, and therefore have a big enough deposit (15%) to remortgage with a lower LTV: 85%. As a result, you unlock a bigger range of mortgages with lower interest rates.
Check your most recent statement from the lender to find out your principal mortgage debt – or phone and ask. You can find out the rough value of your home by doing some research online, or asking an estate agent for a valuation.
However, you do not need to put the full equity amount back into the property as a deposit when you come to remortgage or move house. Instead, you can release some of that equity and use that lump sum of cash to renovate.
Edited by: Sarah Guershon
Last updated: 28 January, 2019
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