The 'loan to value' or LTV is one of the key measurements for mortgage lenders. It measures the amount of money you are borrowing in comparison to the value of the property you are buying and it is expressed as a percentage of the value of the property. Therefore, if you are buying a property worth 185,000 pounds and want to borrow 166,500 pounds, your LTV is 90 per cent.
How much can you borrow? Before the credit crunch, high street lenders would have two 'bands' of LTVs: 0 per cent to 90 per cent and 90 per cent and higher. But now things are far more complex. Many lenders have three bands (and sometimes more): 0 to 60 per cent, 60 to 75 per cent and 75 to 90 per cent.
Many lenders have now decided that anyone with less than 25 per cent to put down as a deposit would have to pay what is in effect, an interest rate surcharge. As few first time buyers can put down more than 25 per cent this effectively, penalises first-time buyers. A few lenders have even reduced their maximum LTV down to 50 per cent.
As a general guide line, the higher the deposit you can raise as a percentage of the property's purchase price, the better deal you will get.
Before the credit crunch most lenders would grant 100 per cent mortgages and some, including the Northern Rock even went as high as 125 per cent. However the 'credit crunch' has put a end to all that. Most borrowers are now very lucky to be able to borrow 90 per cent of the value of their property.
If you are putting down a deposit of less than 25 per cent, you may be required to pay what is called a higher lending charge (HLC). And these can be pricey. HLC's can amount to thousands of pounds. The charges are used by the lender to buy insurance to protect them against a borrower defaulting on their mortgage repayments. Then, if there is a default, the lender can repossess the borrower's home, and if the proceeds from selling the property are less than the outstanding mortgage, the shortfall will be paid by the insurance policy.
The point you must understand is that the fee does not provide you, as the borrower, with any protection whatsoever. Even after your home has been repossessed and sold, the terms of the lender's insurance are that the lender still has to pursue you for the shortfall despite the lender not being out of pocket. They pay any money subsequently recovered to the insurance company.
HLCs are levied on high LTV mortgages - the higher the LTV, the greater the likelihood that you'll be charged a fee and the higher the fee will be. The reason for this is clear. The higher the LTV, the higher risk is that you will default. And if you have only put down only a small deposit, the greater the chance that your lender will not be able to recover sufficient money from the sale of your home to cover the amount it lent you. This particularly applies at times when house prices are falling.
So how much do higher lending charges cost? The cost depends on the particular lender, the value of your property and your deposit as a percentage. HLCs are usually calculated as a percentage of the value of the mortgage in excess of 75 per cent of the property value. Therefore, if your new home costs 185,000 pounds, you can typically expect to pay an HLC of 8 per cent on the amount between 138,750 pounds (75 per cent of purchase price) and the amount you borrow.
So if you were borrowing 90 per cent on a property worth 185,000 pounds, the higher lending charge would be 2,220 pounds: 8 per cent of the difference between the amounts borrowed (166,500 pounds) and 75 per cent of the property value (138,750 pounds).
Most lenders will allow the HLC to be added to your mortgage but of course, they would prefer that you paid it up front with your deposit. Remember that if can pay it up front you'll avoid paying interest on it. As a guide, assuming a mortgage interest rate of 5 per cent, a fee of 1,000 pounds added to a repayment mortgage would cost you 1,752 pounds over 25 years.
Are there any ways to avoid a HLC? The answer is perhaps. Some mortgage companies have decided not to charge HLC fees but charge higher interest rates instead. But in the end it still means you have to pay more!
We suggest you check at an early stage whether you will be required to pay a HLC. Whilst this will be important, it should not be the only factor on which you base your decision. You need to take into account all the costs, the interest rate and the product features.
Author Resource:-
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