Listen to this article
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!
What is an 85% LTV Mortgage?
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.
Advantages of an 85% LTV Mortgage:
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.
- Lower Down Payment:
One of the biggest advantages of an 85% LTV mortgage is a lower deposit amount. With this type of loan, you may only need to pay a down payment of 15% or less, making it a more affordable option for those who don't have a lot of cash on hand for a down payment. This can be especially helpful for first-time buyers who want to break into the housing market but may not have a large savings account.
- Lower Monthly Payments:
Because you're borrowing a smaller amount with an 85% LTV mortgage, your monthly payments are often more affordable. This can give homebuyers more financial flexibility, allowing them to put money towards other expenses or save for the future.
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.
What It Takes to Qualify for an 85% LTV Mortgage:
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.
- Credit Score:
One of the essential things you'll need to qualify for an 85% LTV mortgage is a good credit score. Lenders typically require a credit score of at least 620, although some lenders may offer loans to borrowers with scores as low as 580. The higher your credit score, the better interest rates you'll be able to secure. So, if you're planning to apply for an 85% LTV mortgage, make sure you keep a clean credit history and have a good score.
- Steady Income:
Lenders want to ensure that you'll be able to repay your mortgage on time, so having a stable and consistent income is crucial. You'll typically need to provide proof of employment or income for at least two years, and typically your monthly mortgage payments should not exceed 30% of your monthly income. If you're self-employed, you'll need to provide at least two years of tax returns to show your income.
Even though you're putting down a lower deposit amount, you'll still need to have some savings in the bank. Lenders will want to see that you have funds set aside to cover closing costs, home inspections, and other expenses that may arise during the home-buying process.
- Mortgage Valuation:
Before you can secure an 85% LTV mortgage, the lender will require a valuation of the property. This will determine the market value of the home and the loan amount you'll be able to secure. The valuation must meet the lender's requirements, and any necessary repairs or renovations will need to be completed before closing.
- Debt-to-Income Ratio:
Lenders use the debt-to-income ratio (DTI) to determine if you qualify for a mortgage. Your DTI is the ratio of your monthly debt payments to your monthly income. Lenders typically want to see a DTI below 36%, including your mortgage payment. If your DTI is above the lender's required limit, you may not qualify for an 85% LTV mortgage.
Alternatives to 85% LTV mortgages
- 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.
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.