LTV and interest rate issues when taking out additional loan from mortgage company

aroominyork

Example: I have a £350k mortgage on a £500k property on a 70% LTV five year fix. If I want to take out an additional £50k loan from bank with which I have the mortgage, how would they decide the rate for the additional £50k, taking into account scenarios where a) the property has risen to £575k so my £400k loan total still falls within 70% LTV, or b) where the property value has not risen much?

bowlhead99

They are looking at how risky it is to lend you money. So, if the property value is around £500k and you want to borrow some money (the new £50k) to take your total borrowings up to £400k, then the risk they are looking at is a loan to value of 80%.

If the market dropped in value by 20% to £400k from £500k for your house, and you stopped paying the mortgage, so they wanted to evict you and sell the house, and at auction it didn't reach the expected open market value of £400k but they had to sell it anyway to try to recover their money, and they incurred a bunch of legal and selling costs to do that, they are going to lose some of that £50k they just lent you. So you can expect that £50k borrowing to be priced as an 80% LTV loan.

If instead your house is really worth £575k, you're right that the money you now want to borrow means that your total mortgages are less than 70% of loan to value. So if the market dropped 20% and they had to auction your property they could afford for it to lose another 5% at auction and incur 5% worth of sales and legal costs etc etc and still recover their original £350k mortgage and the new £50k borrowing.

So basically when you borrow the new money, whatever the total loan to value is, gives them their risk, and they will price the new £50k loan on whatever your total new LTV is at.

If your 5 year fix doesn't have a monster redemption penalty you could of course consider how much it would cost you to refinance the £350k (plus the early redemption fee for the old £350k) as well as the new £50k. Either with the existing bank or a new one. Sometimes it is better to just settle the early repayment fee on what you have and start again with a new interest rate on the lot, given interest rates are now at pretty much all-time lows. Other times it isn't, and it's best to just keep the £350k as it is to avoid penalty and have the incremental £50k priced as a separate loan in the 70% or 80% bracket depending on whether the house can be valued at £575k or £500k.

kingstreet

Further advance rates are not normally LTV-based.

It's often one rate for all.

You would need to consider remortgaging to a new lender to get all your borrowings on a high street top rate based on current value.

aroominyork

I thought - maybe wrongly - it was quite straightforward to get an additional loan on a mortgage if your salary was high enough to meet the repayments. Both posters here say we would probably need to pay an early repayment charge and take out a new mortgage for the full amount; is that really so?

The_Logans

aroominyork wrote: »

I thought - maybe wrongly - it was quite straightforward to get an additional loan on a mortgage if your salary was high enough to meet the repayments. Both posters here say we would probably need to pay an early repayment charge and take out a new mortgage for the full amount; is that really so?

No, we took an additional loan on our existing mortgage (to build an extension). Our LTV was only about 20% though, and rose to 25% with the additional borrowing. Our mortgage remained on the same deal as we were in a 2 year fixed but the additional borrowing went on top at a much higher interest rate (about 3.9% I think) until the end of the current mortgage deal, then we can remortgage the whole lot at a much better rate. No early repayment charge when doing it that way. You need to work out what is the more expensive option:
a) remortgage and pay early repayment charge
b) additional borrowing until end of current term with higher interest rate on that additional loan.

aroominyork

If you go for the option of additional borrowing until end of current term with higher interest rate on that additional loan (perhaps a tracker), will they charge the product fee or waive it?

The_Logans

aroominyork wrote: »

If you go for the option of additional borrowing until end of current term with higher interest rate on that additional loan (perhaps a tracker), will they charge the product fee or waive it?

Depends on the provider, that's a question for your lender.