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Buying a home can be an overwhelming process, but understanding 85% loan-to-value mortgages could help make it easier.
Looking to buy a home but feeling intimidated by the high costs? An 85% LTV mortgage might be your answer! In this comprehensive guide, you will get everything you need to know about these special mortgages - from how they work and their requirements, all the way through benefits and drawbacks. Achieving homeownership doesn't have to feel like an impossible dream; let's explore if an 85% LTV could make it happen for you today!
An 85% LTV mortgage allows you to borrow up to 85% of your home's value, which means you'll need to come up with a 15% down payment. For instance, if you wish to buy a £300,000 house, you'll need to offer a minimum of 15% down, which is £45,000, leaving you to finance the remaining £255,000. With an 85% LTV, you can borrow up to £212,500 based on a property worth £250,000, a common property value in many parts of the UK.
One of the most significant advantages of an 85% LTV mortgage is that you don't need to have a large deposit. Many first-time buyers find it challenging to accumulate large sums of cash for a down payment, so an 85% LTV can make it easier to get on the property ladder. Additionally, since the amount borrowed is relatively small, it's more manageable to repay, and this often translates to lower monthly mortgage repayments.
The more you can put down towards your home purchase, the better. If you have a higher deposit amount than the minimum required, you'll get access to better mortgage interest rates, which will significantly reduce the overall cost of borrowing. You'll also require less mortgage insurance, as lenders see higher deposits as less risky.
An 85% LTV mortgage is an excellent option for first-time buyers struggling to raise a large deposit for their home purchase. But it's crucial to remember that the lower your deposit's value, the higher your monthly repayments will be. You'll also need to provide the requisite documentation, have a good credit score, a stable income, and meet other lender requirements to qualify. Nonetheless, with the right preparation, an 85% LTV mortgage can be a great way to achieve homeownership in the UK.
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Most lenders will require that you have a good credit score and a stable income source to qualify for an 85% LTV. Other requirements may include your employment status, your age, and other existing financial liabilities. To increase your chances of getting approved, you need to gather all the necessary paperwork such as bank statements, payslips, and employer references. If you're self-employed or have irregular income, you may need to show more documentation, such as tax returns and business accounts.
There are alternative options to consider if you're looking for alternatives to an 85% Loan-to-Value (LTV) mortgage. Here are a few options:
- 95% LTV Mortgages -
A 95% LTV mortgage requires a deposit of just 5% of the property's value, making it a popular option for first-time buyers who may not have significant savings to put down. While this type of mortgage can be attractive, it's worth bearing in mind that the interest rates tend to be higher than for lower LTV mortgages. The experience of COVID-19 has also highlighted the risk of negative equity if the house prices drop or decrease after buying.
- 90% LTV Mortgages -
A 90% LTV mortgage will require a deposit of 10% of the property value. This option can be slightly more accessible to people who have a larger savings pot, but don't want to stretch too much. A 90% LTV mortgage may offer lower rates than the 95% mortgage but not as low as the 85%.
- 80% LTV Mortgages -
An 80% LTV mortgage requires a deposit of 20% of the property's value, meaning that you'll typically have to pay a more considerable sum upfront. However, along with a relatively low deposit, this option comes with fewer risks, including better interest rates, affordable monthly mortgage payments, and the positive equity.
- 75% LTV Mortgages -
A 75% LTV mortgage is great for those who can put close to 25% down as a deposit. By doing so, you'll get even better interest rates and make monthly mortgage payments more affordable. You also have less exposure to risks, and you could build more equity in the long run.
- 70% LTV Mortgages -
A 70% LTV mortgage will require a deposit of 30% of the property's value. This option is rarely used for primary homes but can be very suitable for investment property buyers. It's the most affordable option when it comes to interest rate costs, which makes borrowing cheaper.
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Generally, interest rates on an 85% Loan-to-Value (LTV) mortgage tend to be higher compared to lower LTV mortgages. Here's a comparison of interest rates between different LTV mortgage options:
Lower LTV Mortgages (e.g., 60% LTV, 75% LTV):
85% LTV Mortgages:
It's important to note that interest rates can vary between lenders and are influenced by factors such as market conditions, the borrower's creditworthiness, and the specific terms of the mortgage. It's advisable to shop around, compare offers from different lenders, and this is were we can help you. We can search the whole of market to find the best available interest rates for an 85% LTV mortgage based on your individual circumstances.
Yes, you can use an 85% Loan-to-Value (LTV) mortgage for both property purchases and remortgaging purposes. Here's how each scenario typically works:
Property Purchase:
Remortgaging:
It's important to note that the availability and terms of an 85% LTV mortgage for both property purchase and remortgaging can vary among lenders.
The potential for negative equity can have an impact on an 85% Loan-to-Value (LTV) mortgage. Here's how it can affect borrowers with an 85% LTV mortgage:
Negative equity occurs when the outstanding mortgage balance exceeds the current market value of the property. This can happen if property prices decrease after purchasing the property. Here's how it can impact borrowers:
It's important to note that negative equity is a potential risk but not an inherent consequence of an 85% LTV mortgage. It depends on factors such as property market fluctuations and the specific circumstances of the borrower.
To calculate an 85% Loan-to-Value (LTV) mortgage, you need to determine the loan amount based on the property's value. Here's the calculation:
For example, let's say the property's value is £300,000:
Loan Amount = Property Value x LTV Ratio Loan Amount = £300,000 x 0.85 Loan Amount = £255,000
In this example, the loan amount for an 85% LTV mortgage would be £255,000.
Remember that the actual loan amount you're approved for may also depend on other factors, such as your income, credit history, and the specific lending criteria of the mortgage lender.
