My Real Debt: Mortgages, Part 1 – Your LTV

Mortgages, Part 1 - Your LTV. Do you find mortgages confusing? Click on the picture to read the first of my series of posts explaining mortgages. This post talks about the loan-to-value ratio and what it does.

 Mortgages: Your LTV

At the risk of sounding like the most boring dinner party conversation, I’m going to talk about my mortgage rate. This is one thing that’s important to get right, since it’s usually the biggest debt of a person’s life, and it shouldn’t be taken lightly. Read on to find out how I got my deal, and how you can get the best rate you can.

Mortgages… yawn…

This feels strange, because I do have a vague memory of being frozen out of one of those conversations, being the only one at the table who was renting their home.
It annoyed me a bit because at one point I strongly believed I’d never own a house again, having had to sell my home at auction during a divorce. The whole process was so distressing that I saw bricks and mortar as a ball and chain, so I tuned out entirely.

What changed?

Fast forward several years and I found myself with a husband who was insistent on buying a house, but really had no clue about personal finance or home ownership. Thanks to knowing all about what can go horribly wrong with owning your own house, I tried to put him off, but it didn’t work.
Instead, I got sucked in, but I realised that I could make my experience, even though a bad one, work for me.

 

My mortgage rate is currently 1.89%. Full disclosure here – my house was very cheap.
Just kidding – you wouldn’t be getting a mortgage on this!

Our mortgage

As we bought a house for £50,000 and paid a deposit of £15,000, we now have an outstanding mortgage of just over £32,500.

 

 

Now, we could have gone for a 25 year term and given ourselves an unbelievably cheap monthly repayment, but we went for a shorter term which will let us pay off the mortgage entirely in 10 years, and at under £300 a month, is still less than we were paying in rent.

 

A few things that can cost you money on your mortgage –

 

  1. Your LTV
  2.  The product type you choose
  3. Your credit rating
  4. Inertia

 

I started writing this all out and it turned into a monster of a post, so I’ve decided to break it down into parts, and hopefully focus better on each.

 

Your LTV

I had a goal when we started looking into buying a house – get a mortgage rate below 3%.
At first, this seemed to be an impossibility for us, but after a while, I learned that by raising our LTV – our loan to value ratio, we could access the better rates on the market.
Loan to value basically means the amount of money you would like to borrow from the bank compared to the amount of money the property is worth. Borrow a lower percentage of the property’s value, and your rate falls into a lower band.

 

Why are rates lower if you have a higher value deposit?

If you don’t need to borrow much, you’re seen as lower risk, and the bank likes you more.

 

LTV ratios usually work in bands – 90%, 85%, 80%, 75%, and so on.

 

Try this calculator to work out your LTV before comparing mortgages.

 

When we told our close friends that we’d saved up a £10,000 deposit, they wondered why we didn’t stop our penny pinching and just go after that £100,000 house around the corner. After all, you only need a 10% deposit, right? Well…

 

Yeah, sure, but I didn’t want to be paying through the nose for this house forever. I wanted to cut our outgoings when we moved. If we bought a £100,000 pound house, our deposit would be 10%.
If we bought a £50,000 house, it would suddenly be 20%. I set our budget to nudge us into the 60% LTV bracket.
This way, I know that it is entirely possible for us to pay off our mortgage in 5 years.

This is only my approach…

Some people will disagree with my approach – spending less on a house initially, but having to spend afterwards because it needs renovation. Many would gladly pay upfront for the finished product as they couldn’t hack living in a fixer-upper like this for as long as we have, and that’s ok. For me, I see it in terms of numbers –

 

I either borrow at a higher rate up front, or pay later in labour.

I chose the option that would allow me to continue living below my means. There’s no doubt about it, you pay one way or the other; money isn’t the only means of payment.
We’re paying with labour and putting up with inconveniences, but we’re not being charged exorbitant rates of interest.

What a low LTV does for you

However, setting a budget that gets you into the lowest possible LTV bracket you can doesn’t mean that you end up with a fixer-upper like us; it just means that you’re getting yourself into the best possible position for getting a good mortgage rate.
Since mortgage terms are starting to creep up past 25 years to 30 +, knocking a few points off of your interest rate can only be a good thing.

 

Knowing what your LTV means and whether you can adjust it by either adding to your deposit or shaving off your purchase price is an essential tool in your money-saving kit. Up next: fixed, tracker or offset?

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