You will most likely already be familiar with the concept of loan to value (LTV). If not, this is simply a ratio: the size of your mortgage relative to the value of your property.
It is one of the major factors that dictate the interest rate you will be offered when applying for a mortgage. The smaller the mortgage vis-a-vis the value of your home, the lower the interest rate.
LTV is something people tend to pay close attention when they first apply for their mortgage. However, I’m not so sure it’s something people give a second thought to once they’ve purchased their home, and start paying it off. I think this is a mistake! Particularly if any of the following apply to you:
- You purchased your property at a good price
- You’ve done a lot of home improvements
- Your local property market is particularly buoyant
To give context, it’s important to understand that:
- The price you paid for your property doesn’t necessarily equate to how much your property is actually worth
- Your mortgage provider will not be not be coming over to admire the new extension you’ve just had built
- Your mortgage provider is not necessarily keeping tabs on movements in your local property market
I was mid-term on my tracker mortgage when I decided to contact my mortgage lender, Nationwide, to ask them what they had down as the value of my property. I discovered their figure was an incredibly small increase on what I had paid for the property 2 years ago. However, I was in the fortunate position of having bought my house for a real steal and, having renovated the property, was certain it had gone up at least £30,000.
Nationwide said they would need to do some research to verify the figure I’d suggested the property was now worth was accurate and would get back to me the next day. Gladly, less than 24 hours later, they called to confirm my valuation. This put me into a new LTV bracket with a lower interest rate. This resulted in my monthly mortgage payment being significantly reduced: by £100, from £957 to £857!