When you remortgage, you’ll notice that deals usually show a maximum loan-to-value figure expressed as a percentage next to them.
The loan-to-value is the amount the lender is prepared to let you borrow in relation to the property’s value. For example, if a mortgage has a maximum 80% loan-to-value, this means that you’ll only be able to borrow up to 80% of your property’s value, so you must own at least 20% of the equity in your home.
If a mortgage has a 60% maximum loan-to-value, you’ll only be able to borrow up to 60% of the property value and must own at least 40% of the equity in your home.
The best mortgage rates are normally reserved for those with a large amount of equity in their property, as they’re considered the lowest risk by lenders. For example, MPowered at the time of writing, was offering a two-year fixed rate mortgage at 4.67% for homeowners looking to remortgage at a 60% loan to value. This deal has a £999 arrangement fee. If you have a 75% loan to value, however, the cheapest two year fix was from Leeds Building Society at 4.74% two-year fix with a £1,499 fee.
Monthly payments on the same £150,000, 15-year repayment mortgage at the 4.67% rate would cost £1,161 but £1,166 at the higher rate of 4.74%. Over the two-year fixed rate period, you’d save £120 if you found yourself eligible for the 60% LTV mortgage deal rather than the 75% deal, before arrangement fees are taken into account.
If you’ve been slowly paying off your mortgage and benefiting from rising house prices over the years, you are likely to own a greater proportion of equity in your home, so it’s well worth seeing if you’re now eligible for better mortgage rates. If you find yourself close to the edge of the next LTV band, you might also want to see if it’s worth scraping together enough savings to pay off your mortgage to enable you to move down a LTV band and access better mortgage rates.
