Loan-To-Value Mortgages for First Time Buyers
Being a first time buyer for a house is a big exciting step in life, but as exciting as it is buying your dream home, it can also be stressful. Especially when it comes to saving up for that deposit. In this article, we will look at Loan-To-Value (LTV) mortgages and discuss how a lower LTV requires a higher deposit, but unlock lower interest rates to pay, and how they can help a first time buyer by only needing a deposit of 5%.
What is a Loan-To-Value (LTV) Mortgage?
A loan-to-value mortgage is the size of your mortgage compared to the total value of the property shown as a percentage. For example, if you were to choose to buy a house that has the total value of £250,000 and chose to pay £25,000 as a deposit and borrow £225,000, then it means that your loan-to-value percentage is 90%, as your deposit was 10%.
How is a Loan-To-Value Calculated?
A loan-to-value percentage is calculated by the following steps;
- Your total mortgage loan amount divided by the your property’s purchase price or appraised value, for example you borrow £225,000 to pay for a £250,000 property, then it is 225,000 divided by 250,000 which is 0.9.
- Multiply your answer by 100 to get your Loan-To-Value percentage, example carried on, 0.9 x 100= 90%.
What Does Loan-To-Value Mean for Deposit Requirements?
A loan-to-value mortgage means that you can secure a property with as little as a 5% deposit. However, this will mean that your loan-to-value percentage will be as high as 95%. Higher loan-to-value percentages are paired with smaller deposits, and therefore will have stricter checks and may even have your lender asking for extra insurance fees.
Loan-To-Value 5% Deposit for First Time Buyers
A 95% loan-to-value with a 5% deposit is a great way to help first time buyers quickly secure a property, as long as they are aware that the interest costs will be higher. With the cost of living being higher these days though, it can be more difficult for first time buyers to save up for a deposit for a property. So a Loan-To-Value mortgage can be ideal to help them to get onto the property ladder with a deposit as little as 5%.
Hidden Costs of Loan-To-Value Mortgages
As great as it sounds, being able to secure a property with a small 5% deposit, there is also the issue to remember that along with higher monthly mortgage payments to pay off the property, there is also the following costs to remember;
- The “Loan-To-Value Rate Gap” – With a 5% deposit meaning you are borrowing at 95% loan-to-value, you will end up paying approximately 0.8% -1.3% more in interest compared to a 75% loan-to-value percentage.
- Negative Equity Risk – If the property price dips and you have secured it with a 5% deposit; you may end up paying or owing more than the property is actually worth. This could also stop your remortgaging options in the future.
- Tighter Affordability Hurdles – To offset high loan-to-value risk, lenders will most likely tighten income criteria by putting caps at approximately 4.5 times your annual gross income, unless they are utilising specialised first time buyer schemes.
Points To Remember
If you are considering a loan-to-value mortgage, to get you onto the property ladder, remember the 3 following points;
- Aim for the Threshold – If you have saved up an 8% deposit, then do your very best to find the remaining 2% to make a 10% deposit to lower your loan-to-value percentage and future costs. This could save you thousands over a 2-5 year timeframe.
- Account for Friction Costs – Don’t use all your entire savings on the deposit for your property. Remember to also keep money aside for legal/conveyancing fees and surveying fees throughout the mortgage/house buying process.
- Log Gifted Funds Properly – If family members have helped you with the deposit , then your lenders will require a signed “Gifted Deposit Declaration”. This is to prove that the deposit is a gift and not a loan that will impact your debt-to-income ratio in the future.
If you are wanting any further advice on Loan-To-Value (LTV) mortgage schemes as a first time buyer, please contact us at LPR Mortgage Services on 07568 091968 or email us at lloyd@lprmortgages.co.uk.
