Maximising LTV to minimise interest - is this really optimal?

chamelion

Hi all,

In the process of applying for first mortgage. Everyone i've spoken to + all guides I've seen talk about maximising your deposit to hit the 'sweet spot' for LTV at around 60% before you start getting all the best deals (e.g. First Direct @ 1.15%).

However, is this really the best thing? For example, let's say if I'm buying a £500k property:

@60% LTV (1.15% fixed, 2 years):
monthly payment = £985.73

@75% LTV (1.29% fixed, 2 years):
monthly payment = £1005.40

Difference = £19.67

However, that 15% difference in LTV (£75,000) I could keep as cash myself, and even having it in a modest rate savings account (let's say 1.5%) I'd make £1,125/year (let's skip tax for the moment). That's £93.75 of interest per month I could be making on that 15% difference, and only paying £19.76 more per month of mortgage?

In this example, wouldn't it make more sense to go with the higher LTV, borrow more at a pricier amount, and keep more cash in my savings account gaining interest, that could even be used towards procuring a buy to let?

Thanks!

ACG

The 75% product would be at a higer rate, not the 1.15%?

But yes, if you can get more in interest (after tax) than the rate you are paying then you would be better going down that route.

chamelion

ACG wrote: »

The 75% product would be at a higer rate, not the 1.15%?

But yes, if you can get more in interest (after tax) than the rate you are paying then you would be better going down that route.

Correct - 75% product rate was 1.29% (fixed over 2 years), and there's even a 80% product rate at 1.45%. All these are first direct - not even checking what better deals exist for the 75%/80% brackets...

getmore4less

chamelion wrote: »

Hi all,

In the process of applying for first mortgage. Everyone i've spoken to + all guides I've seen talk about maximising your deposit to hit the 'sweet spot' for LTV at around 60% before you start getting all the best deals (e.g. First Direct @ 1.15%).

However, is this really the best thing? For example, let's say if I'm buying a £500k property:

@60% LTV (1.15% fixed, 2 years):
monthly payment = £985.73

@75% LTV (1.29% fixed, 2 years):
monthly payment = £1005.40

Difference = £19.67

However, that 15% difference in LTV (£75,000) I could keep as cash myself, and even having it in a modest rate savings account (let's say 1.5%) I'd make £1,125/year (let's skip tax for the moment). That's £93.75 of interest per month I could be making on that 15% difference, and only paying £19.76 more per month of mortgage?

In this example, wouldn't it make more sense to go with the higher LTV, borrow more at a pricier amount, and keep more cash in my savings account gaining interest, that could even be used towards procuring a buy to let?

Thanks!

you have missed out a very important bit(which I will cover later).

£500k 60% borrow £300k @ 1.15% interest £3450
£500k 75% borrow £375k @ 1.29% interest £4837.5

£1387.5 difference to be made up by interest on £75k
needs to be at least 1.85% net to break even.

The bit you missed on your calculation was the amount owing will be different because the capital bit of the mortgage payments will be different.

Rolling the £19pm into both loans paying £1005 on both
£300k @1.15% after 1 year £291345
£375k @1.29% after 1 year £367735
£75k @ 1.5% after 1y £76125
take off the savings left with £291610

So you lose £265 over the first year not make £74pm
Edit:

If you can get a saving rate over 1.85%.net then you start saving.

dimbo61

So you are buying your first property and if you are talking £500K property it is a big investment and that is before all the other costs!
Stamp duty, legals, mortgage fees, survey etc
You should look at the long term!
The bigger deposit the better rate of Interest you get and less Interest you pay.
You hope one day to pay off the mortgage and have a home to live in for old age or sell and move somewhere to retire which is cheaper and suits your needs

Strummer22

getmore4less wrote: »

you have missed out a very important bit(which I will cover later).

£500k 60% borrow £300k @ 1.15% interest £3450
£500k 75% borrow £375k @ 1.29% interest £4837.5

£1387.5 difference to be made up by interest on £75k
needs to be at least 1.85% net to break even.

The bit you missed on your calculation was the amount owing will be different because the capital bit of the mortgage payments will be different.

Rolling the £19pm into both loans paying £1005 on both
£300k @1.15% after 1 year £291345
£375k @1.29% after 1 year £367735
£75k @ 1.5% after 1y £76125
take off the savings left with £291610

So you lose £265 over the first year not make £74pm
Edit:

If you can get a saving rate over 1.85%.net then you start saving.

I think you've got that right. Nice illustration.

OP - you can have 3 Santander 1-2-3 accounts; you, your partner, and a joint. That gives you 60k at 3% (tax free if you're lower rate payers, though you're getting close to the 1k tax free limit each on just the interest from that 60k).

Interest rates on mortgages can be stupidly, blessedly low, as you've found. By keeping back some capital to gain interest, you're basically having a self-managed offset mortgage that gives a better return than actually having an offset mortgage. You technically could keep doing this for as long as you can find places to put your money that pay a higher rate than your mortgage interest, but might gain some peace of mind by putting chunks of money into the mortgage every couple of years or so, especially if some of your money is not covered by FSCS.

pathtofreedom

What rate does it go up to after 2 years? Do you know 100% you are going to stick with that bank forever? If you remortgage to another company you will have to pay solicitor and valuation fees again. Either way you might have to pay mortgage setup fees again. So you want to compare longer terms as well when you do calculations like this, as you might have to pay 500-1500 or more if you do move banks every two years.

chamelion

Ok - as mentioned above yes it would effectively be a self-managed offset mortgage.

I've read the comments and am now trying to factor in everything - taxes, interest on money on hand etc. Take a look at the spreadsheet:

https://www.dropbox.com/s/xmr9g29xjghh2fj/mortgages.xlsx?dl=0

Essentially, I've calculated 3 scenarios. In each I have a £500k house, £250k of savings, a 30 year term, a 1.5% savings interest rate, and 40% tax.

For each of the scenarios I've worked out, after 2 years, what the outstanding amount of the mortgage would be (column K), how much interest I'd make on the money NOT given to the bank as part of a deposit (column J), with the various LTVs offered by one bank - first direct.

If the calculations are correct, the higher the amount I borrow, even though the rate goes up, the total money I have at the end of 2 years goes up!

So if I plonk down £200k of deposit, after paying £1450 of fees, my total "net worth" after 2 years (i.e. cost of house + money i have + savings interest earned - money i still owe), at a 1.15% rate means I'm worth £266,371.29.

However if I plonk down a much smaller £100k, my net worth is £272,836.28. That's a £6.4k difference, so even if I remortgage in 2 years and spend another few grand I'm still better off having kept more of the deposit to myself, put it into a meager savings account (1.5%), even after paying taxes on it!

Now imagine if I put that money into santander (which I and my partner have 2 each of), that'd give us 3%, which would boost the net worth difference by £10k!


Assuming I'm going for the 2 year fixed path (pretty much regardless) shouldn't I just borrow more and settle for a crappier rate? Given how 'cheap' it is to borrow the money?

Assumption is also after 2 years I can make a penalty free 'bulk payment' against the loan, and borrow less from the next bank if the rates are wildly different at that time - I'd have the cash in hand that would have worked *better* for me in the 2 years leading up to that point, rather than have it sit with the bank.

getmore4less

If you do the math it becomes a simple ratio of rates to cash and debt

Have a search of the offset thread

Stick the numbers up £6.4k sound a lot over 2 years using a savings rate of 1.5%

getmore4less

You have ignored the monthly payment in your net worth.

getmore4less

The later cases don't past the "does it smell right test" so the alarm bells should have been ringing there is something wrong with my spreadsheet.

How can you borrow money at 1.59% put in savings at 1.5% taxed at 40% and be better off?