05 February 2015

Small deposits, LTVs and credit scoring

You may have heard the term LTV a number of times when it comes to mortgages.  This stands for Loan to Value and effectively the definition is the amount you are borrowing compared to the value of the property.   This is especially key when a lender is a assessing your mortgage, as a higher LTV will create more of a perceived risk to the lender.  Mainly due to the fact that if house prices dropped sharply, the lender may not get their full loan amount returned, should they need to repossess the property for whatever reason.  Some lenders will charge a separate insurance for such high borrowing, normally called a Mortgage Indemnity Guarantee or Higher Lending Charge.  As such, you might find that a person who is borrowing 95% LTV and just investing a 5% deposit will attract the higher mortgage rates versus someone investing  a 25% or larger deposit.  Usually these are stepped, so up to 60% LTV, rates will be around 1% cheaper than those borrowing up to 70% LTV.  Then in turn these tend to be 1% cheaper than those borrowing up to 80% LTV,  and this will be cheaper than the next 5% LTV increase, and so on right up to 95% LTV.  So, in short, the more you can save for a deposit, the lower the interest rate you will probably receive from the outset.

This also is the same with credit scoring.  Credit scoring is one of the most widely used means to assess a customers ability to obtain a mortgage.  If you have had a number of recent credit searches for home insurance, car insurance, mobile phones, etc, this may affect your ability to achieve the best rates available to you.  In some cases it might also affect the amount of loan offered to you.  So make sure you have seen you credit report (experian, equifax, noddle), and know what appears on there.  This is your financial history to any lender and should be treated as your CV to a prospective party!  Try and keep payments up to date as anything within the last six years will probably be visible and may affect your ability to borrow.  However, if you do fail a lenders credit score, don't give up.  There are an increasing number of lenders willing to assist (depending on the nature of the decline) and they will also manually assess. A human making the decision, rather than a computer. 


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