your loan-to-value can save you a lot of money

LTV is something that I would assume many people who own property have heard of. For those of you new to the world of property and mortgages – it is Loan-to-Value. 

LTV is a simple metric yet it is worth knowing few things about this. Few simple tricks about these could save you a fair chunk of cash. This topic mainly becomes relevant when you plan to remortgage. If that is the case – knowing other remortgage tricks that can save money is important.

I will explain below what LTV is. I will also cover how you calculate it yourself really easily. Next, I will share a few tricks you can use to potentially reduce your repayments. 

what does loan-to-value mean?

Loan-to-Value is a metric that lenders use in order to establish how risky of a borrower you are. The lower the borrowing you have compared to the value of the asset you put against it – the less risky you are seen. 

LTV can be used in many different scenarios – buying a home, rental property, a car and so many more items. 

When buying any of the above or anything else – there is a value that the lender can reposes and the loan you are taking out against the item. 

how do you calculate ltv?

The calculation for LTV is extremely simple. You take the value of your loan and divide it by the value of the asset. 

An example of this can be your mortgage. Let’s assume your home is worth £300,000. You are putting down a £60,000 deposit and taking the rest as a mortgage. 

In the above scenario your mortgage is £240,000. This means that your LTV is 0.8 or 80% (£240,000 divided by £300,000). 

If maths isn’t your thing and you don’t have a calculator to hand – you can use an online LTV calculator. 

why do lenders like using loan-to-value

There are two things that contribute to LTV being a coefficient that lenders love to use. This makes lenders see people with lower Loan-to-Value less risky. As a result they reward them. 

Firstly, the lower the coefficient – the more asset value there is for the lender to recover if you stop with your monthly repayments. 

Let’s assume 2 different LTV coefficient on a home – 90% and 75%. In the first case the property needs to lose only 10% of its value and the lender might struggle to get their money back. Second scenario gives the lender way more confidence – the property needs to lose 25% of its value in order for the lender to struggle with getting the value of the loan back. 

Secondly, this is somewhat more of a psychological factor. The more value you own in the property, the harder you will try to find a way to stick with your monthly payments. 

Let’s imagine your own 50% of a £300,000 home. You would do everything possible to make sure you keep up with your repayments and find potential solutions. Alternatively, you could lose £150,000 that are currently repaid within your home. 

On the other hand, if you only own 5% off the property – there is less for you to lose. 

ways to reduce the ltv coefficient

As a Loan-to-Value is a simple formula consisting of 2 numbers in it – you have 2 ways to reduce the coefficient. 

First option – you can reduce the top part in the formula above. This would mean reducing the actual loan you have. 

There are few ways to go about this. Firstly, you can increase your monthly payments. Secondly, you could pay a lump sum. 

In both cases you have to be careful not to pay out more than what you are allowed to overpay by within a given year. If you were to go over that threshold – your lender could charge you a fee. 

Second option to reducing LTV – increase the bottom part of the formula above. As the value of your home grows – the LTV coefficient becomes smaller. 

A simple trick could be some DIY that adds value to your home. A simple thing many people can do – sort out their garden. This is something that can instantly add value. 

Other parts of your home that add value instantly are kitchen and bathroom. Getting either of these sorted and bringing it to a great condition instantly boosts the value of your home. 

Be careful not to take on too big of a project that might end up costing more than the value it adds. 

a mistake people make when they remortgage

One mistake I’ve seen people make when remortgage – use value that they paid for their home rather than the current market value. With properties normally going up in price – you might be giving your lender an out of date value which is significantly below the true market value. 

If you struggle to estimate the value of your own home based on the prices of properties sold near by recently – getting a professional to do this for you could be a good idea. 

Let’s assume that a professional will charge you £250 for the job. If the property went up in price significantly enough – you can benefit from the above payment. 

Let’s assume your home was worth £100,000 when you bought it 5 years ago. You put down a £10,000 mortgage and repaid further £15,000 over the last 5 years. If you were to use the original purchase price as the value – your LTV would sit at 75%. 

Let’s assume the professional was able to estimate the value of your home at £125,000 instead. With a remaining mortgage of £75,000 your new LTV would be 60%.

The difference between the mortgage rates of these 2 LTVs could be as big as 0.5%. If you had 15 years left on your mortgage with current rates of 6% and 6.5% – the monthly mortgage payment difference could be £20.

If you were to take a 2 year mortgage – this would save you £480. Less the £250 you paid for the valuation – you are up £230 in 2 years.  

If you were to take 5 year mortgage – you would save yourself £950. 

Try estimating the value of your home based on your neighbours home prices and save yourself the £250. The process isn’t that difficult. 

loan-to-value mortgage brackets

The last thing to be aware of when it comes to Loan-to-Value – there are brackets that lenders use to give you a cheaper rate. These are easy to figure out if you use the formula I shared above. 

In the UK the brackets start at 95% and go don’t to 60% in increments of 5%. Every 5% of reduction in the coefficient gives you a better mortgage rate. 

The difference between 95% and 60% can be as big as 1.5% in terms of interest you are charged.

This can really make a massive difference over years of paying your property out. There is a quick little trick to do when it comes to remortgage. CHECK YOUR LTV!!!

A simple payment of £500 lump sum could theoretically reduce your monthly bills by £20-30 each month for the rest of your life. 

Not only you reduce your total outstanding balance but also pay less monthly. 

An example of this can be – we know from above that if your home is worth £300,000 and your outstanding mortgage is £240,000, this would result in LTV of 80%.

The catch here however is – if your outstanding mortgage would be a single pound over £240,000 you would automatically fall into a rate bracket that is between 80% and 85%. 

Reducing you balance slightly could decrease the monthly payments you get significantly. 

A trick definitely worth keeping in mind!!

summary

Loan-to-Value is a fairly generic term. Not everyone thinks about this at all times. Hopefully the above will make you reconsider this.

As you can see, knowing more about LTV and applying it in real life can make a significant difference to your personal finances. This can either become a massive saving or an opportunity to reduce the term of your mortgage a lot.

Whenever it comes for you to remortgage – discuss what options you might have with a professional. A good mortgage advisor can cost you – however the benefits can really be worth it.

One other thing to keep in mind here – free mortgage advisors can also help and add a lot of value to your personal finances.