The real cost of a high loan-to-value (LTV) mortgage
2nd October 2019
More people are borrowing a large portion of what their home is worth compared to the size of the deposit they put down. (1)
These homeowners are taking out what’s known as a high loan-to-value (LTV) mortgage.
The LTV is the percentage of the total property value that’s being paid for by the mortgage.
For example, if you have a deposit of £20,000, and you’re buying a house for £200,000, you have a 10% deposit, and therefore an LTV of 90%.
Mortgages with an LTV of 90% or above accounted for around 19% of all lending in the first three months of 2019, the highest level since the financial crisis. (1)
But is taking out a high LTV mortgage a smart thing to do?
The rise of the high LTV mortgage
There are a couple of reasons for the trend.
One is the falling cost of mortgages. For example, five-year fixed-rate mortgages with a 95% LTV have gone from having a typical interest rate of 5.58% five years ago to 3.64% in September 2019. (2) (3)
There are also far more mortgages on the market with a high LTV.
In September 2014 there were 44 products for five-year fixed-rate mortgages with a 95% LTV compared to 128 in September 2019. (4)
The benefit of a high LTV mortgage
If you take out a mortgage with a 90% or 95% LTV you don’t have to put down a big deposit compared to how much you’re borrowing.
This can be particularly attractive if you’re a first-time buyer. Nearly a third of aspiring first-time buyers say finding a deposit is the biggest barrier to getting on the housing ladder. (5)
This isn’t surprising given how property prices have outstripped wages in recent decades.
High LTV mortgages are more expensive
Taking out a high LTV mortgage might seem a good idea if you’ve got a small deposit.
But there’s a big downside.
High LTV mortgages are more expensive because their interest rates are higher.
For example, as of 31 August 2019, the average interest rate for a two-year fixed-rate mortgage is:
2.95% for 95% LTV
2.09% for 90% LTV
1.64% for 75% LTV (6)
Risk of negative equity
The higher up the LTV scale you go, the more you risk your home falling into negative equity.
Negative equity is when the size of your loan becomes bigger than the value of your home.
This can happen if house prices fall, which they did dramatically between September 2007 and February 2009, plunging by about 20%. (7)
If you fall into negative equity you could be trapped with your current lender and find it difficult to move.
Getting a low LTV mortgage
If you have a larger deposit, and therefore a lower LTV, you’ll have access to a greater number of mortgage deals and lower initial interest rates because lenders see you as lower risk.
One way to get a bigger deposit is to appeal to the Bank of Mum and Dad. Your parents could even lend you the money, rather than give it to you, so they won’t be out of pocket.
If the Bank of Mum and Dad isn’t an option, your best bet is to draw up a budget and start saving.
It could pay to wait
“Strong competition between lenders has led to high LTV mortgages being increasingly competitive,” said Haris Sehic, a Mortgage Adviser at Trussle.
“However, taking out a mortgage with 95% LTV is markedly more expensive than one with 90% LTV. Nor is it without risk, given that house prices can fall at any time.
“It may be worth saving for a bigger deposit, depending on your personal situation.”
(1) Bank of England
(4) Moneyfacts press release 16 Sept 2019
(6) Bank of England