Remortgages & deposits

30 September2009

For anyone who`s looking for a remortgage, the issue of deposits is an important one. Right now (September 2009), no-one is sure whether house prices are about to go up or down. That makes mortgage lenders particularly cautious about lending - and makes the subject of deposits particularly vital.

Some definitions

Before we look at remortgages and deposits, here are two essential definitions:

LTV

Loan to Value - the percentage of a property`s value that a mortgage/remortgage would account for. So:

  • A 50,000 mortgage on a 100,000 property would be a 50% LTV mortgage.
  • A 50,000 mortgage on a 200,000 property would be a 25% LTV mortgage.

Equity

The amount of the property`s value that the homeowner owes nothing on (the proportion that they`ve paid for + any increase in value). So:

  • Someone with a 50,000 mortgage on a 100,000 property would own 50,000 of equity.
  • Someone with a 50,000 mortgage on a 150,000 property would own 100,000 of equity.
  • Someone with a 50,000 mortgage and a 25,000 loan secured on his 150,000 property would own 75,000 of equity.

Remortgages & deposits - a simple example

Imagine two homeowners - Mr Jones and Mr Smith - both live in properties worth 100,000. They`re both looking for a remortgage.

  • Mr Jones has 5,000 of equity (a 5% deposit), so he needs a 95,000 remortgage (95% LTV).
  • Mr Smith has 40,000 of equity (a 40% deposit), so he needs a 60,000 remortgage (60% LTV).

If the value of Mr Jones` property drops below 95,000, this would mean that he would be in `negative equity` - he`d owe more than the house is worth, so some of the mortgage debt wouldn`t be secured against property.

The value of Mr Smith`s property would have to drop below 60,000 for him to be in negative equity.

Remortgages & deposits - in 2009

This time next year, either of these two houses could quite easily be worth 90,000 or 110,000, depending on what happens to house prices.

In the example we`ve used here, Mr Smith`s mortgage is less risky from the mortgage provider`s perspective. This means he`s likely to get a much better interest rate on his mortgage than Mr Jones.

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Tags: remortgage, deposit, equity, mortgage, mortgage deposit, remortgage deposit, low deposit, small deposit

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