LTV & the remortgaging tricks that’ll save you thousands

Don’t miss out on even better deals when looking for a new mortgage offer.

If you’re on a fixed mortgage deal you might just see remortgaging as something you need to do to avoid moving on to a more expensive standard variable rate. Of course doing that will save you money but it’s possible to use remortgaging to reduce how much you pay over the term even more.

I’m not going to go through everything you need to do when you remortgage here – things like check your credit report for errors, get paperwork together and watch your spending and credit applications in the run-up to your application.

This is all very important stuff and could well have changed since you last got a mortgage. So do read up on all of that.

Instead, I’m going to focus here on a few simple things you can do that could make a big difference to the monthly and total cost of your mortgage. And the main one involves something called “Loan to Value”.

Watch this video or keep reading (or both)

What is Loan to Value?

Loan to Value, or LTV, is essentially how much you have borrowed against the value of your house. So if you originally bought a £300,000 house with a £30,000 deposit you would have had an LTV of 90%. That’s a mortgage loan of £270,000.

So why does this matter to remortgaging? Well, LTV is measured in bands. They generally start at 95% (meaning you’ve put down a 5% deposit) and drop in 5% increments down to 60%, though sometimes the gaps between tiers are larger (eg 75% and then 60%).

Mortgage interest rates tend to then drop for each band you move down. And obviously the lower the interest rate you get, the less you’ll pay.

For example, at the time of writing, a 5-year fix with First Direct with 90% LTV is 2.84%, while an 85% LTV would get you 2.34% and 80% would be 2.19%. And it keeps falling. A mortgage with an LTV of 75% is 1.59% and 60% is 1.49%. A big difference.

And over time there’s a good chance your LTV will have changed, therefore meaning you might getter a better deal when it comes around to remortgaging.

There are two key changes that could have affected your LTV since you agreed to your last mortgage deal.

How your LTV could have changed

First, unless you’re on an interest-only mortgage, you’ve been paying into your mortgage every single month, building up equity.

Say you’ve knocked £15,000 off the mortgage in equity payments (don’t forget some of your monthly repayments will have gone towards interest charges), then you have added an extra 5% to what you own. This means your LTV would now be 85% and you can apply for the next tier of mortgages.

And second, your property value could have increased. Let’s say it’s now worth 5% more at £315,000. That’s an extra £15k. Alongside your initial deposit and the 15k in repayments, it would give you £60,000 of equity – roughly 19% of the total value. That means the LTV is now 81%. 

However, in the example above, the repayments and extra value might give an LTV of 81% but it would still only mean getting access to deals in the 85% LTV bracket, rather than 80%.

When you’re really close to a new tier, finding some extra cash from savings or cutting back ahead of remortgaging would be well worth it. Here an extra £3,000 might seem a huge amount but the drop down to the 80% band could be a big saver over time.

Using our example mortgage size, a 0.45% difference between 85% and 80% LTV tiers over five years would be just £2,000, but over 25 years that variation in rate would be worth £15,000.

I always use the mortgage calculators from Money Saving Expert to work out what effect things like different rates have on payments, so it’s worth taking a look at playing around.

How to get a new valuation for LTV

You can get a sense of price changes using a site like Zoopla. You put your postcode in and you’ll get an estimate as to the current value of your property. It’ll be shown in a range which can be quite broad. For example, it suggests my house has gone up by £20k to £79k more than we paid for it two years ago.

You can also get an idea from Zoopla and RightMove as to what other similar properties have gone for recently. Have a nose at the listings online so you can see if it’s a similar layout and standard inside. Remember these are just guides.

For a more accurate idea you could invite an estate agent over to give you their input – there’s no commitment for you to list the house if you do this. You can then put a figure on your application. 

The mortgage lender will then want to do their own valuation (and charge you for it!). This could just be a drive-by looking at the outside of the property, or they might want to come into the house. You probably won’t know which one it is, so make sure everything looks good inside just in case. 

This won’t happen though until you’re already quite a decent way through your application process so if you don’t get what you want to bear in mind you’ll start all over again with another lender. 

Shop around for the lowest rate

Once you’ve checked the LTV you could just remortgage with your existing lender. That might be the quickest option, and it could mean you don’t need to go through as many hoops and cut out some fees. But it could also mean you’re missing out on some much lower deals. 

You can see general rates on comparison sites, which are really handy to get an idea of what’s out there. You can also talk to a mortgage advisor.

A few extras to bear in mind when comparing different rates:

Find out if you are able to overpay 

It’s really worth looking to see what the rules are in terms of overpayment. Some won’t let you do it at all, while others might have annual limits. Best is complete freedom to pay what you want each month and the ability to clear it completely before the term ends.

Even if you don’t think you’ll be able to overpay by much, if at all, right now, you never know how things could change. It’s really useful to have that flexibility.

And overpaying can save you a fortune in interest charges as well as help you clear the debt earlier. There’s more on whether you should pay your mortgage off early here.

Watch out for fees

You’ll get charged all sorts of different fees with different mortgages, and they can make good looking deals actually worse than ones with higher interest.

The main ones are the arrangement and booking fees. These facilitate the deal and could be non-refundable. You need to factor in these to the total cost of the mortgage deal.

Do this over the length of the deal (eg three years) to work out what you’ll actually be paying over time, and compare it to one with higher rates and lower fees.

Consider if you want to fix for longer

If interest rates are going to shoot up in the coming years, you might want to look beyond the usual 2-year fixes. There are often five and 10-year options available, though you’ll pay a higher rate for these.

Check how much you’ve left to pay

One reason not to remortgage is when you’ve almost cleared your debt. That’s because the fees that are added to new deals could well wipe out the savings you’ll make by sticking put – even if it’s at a higher interest rate! So work out how much you’ll be paying by sticking put just in case it works out cheaper.

When to remortgage

It’s worth looking for new deals around three months before your deal ends as it can take time to get the process approved.

Saying that, you can remortgage at any time, though if you do it before your deal ends you could get hit with exit fees – usually known as early repayment fees.

So generally it’s best not to do it early but you might want to keep an eye on any potential base rate changes by the Bank of England.

If it looks like there’s going to be a significant rise you might want to switch your deal early to get hold of lower price deals – but of course you need to factor in any early repayment charge as well as any changes to LTV.