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Mortgage help

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  • Mortgage help

    Hi,

    Hoping someone can help me

    I purchased a property 3 years ago for £250k and have a mortgage for £180k. The property is now worth £370k and I am due to remortgage this year

    How does the remortgage work?

    The increase in value of my property help me? Or do they just look at the fact that the house has only a equity £70k being my original deposit?

  • #2
    Re: Mortgage help

    Hi Peaky.

    I hope you have your numbers hat on!

    At the point of purchase, the £70k you supplied would indeed be the equity as the difference between £180k (mortgage) and £250k (House value).

    Now though, if valued at £370k (which I'd like to say is an amazing return for 3 years!!) the extra increase in value from the purchase figure (£250k) will now also be classed as equity and therefore you've gained an extra £120k, in addition to your original £70k, and therefore you now have a total of £190k equity. Make sense so far?

    But, assuming you're on a repayment mortgage, not only will you have been paying interest for the last 3 years, you'll also have been paying some of the capital (the original £180k borrowed) and therefore that reduction will also add to the equity figure. As an example, if as a repayment towards the capital, ignoring interest, if you paid off £5k per year, that is a total of £15k which means your original £180k is now actually £165k and therefore using the above figures, with a value of £370k and a mortgage of £165k, your equity is £205k! Still making sense?

    But, for now, forgetting the above bit about repayment and guessing at what you may have paid, going back to the current value, £370k and your ORIGINAL mortgage at £180k, your equity is £190k but in terms of mortgages and re-mortgaging, although more equity is good as it means you've borrowed less, the mortgage lenders look at the loan to value (LTV) figure. This is calculated by dividing the amount borrowed by the value of the property and multiplying by 100 to get the LTV percentage.

    So originally it would have been: £180 / 250 * 100 = 72%
    Now though: £180 / 370 * 100 = 49%

    Your monthly payment is calculated using an interest rate that is based on the LTV and this is usually split into categories such as 50%, 65%, 75%, 80%, 85% and 90% for residential mortgages so originally at 72%, you'd have been rounded up to the 75% bracket. Now though, you'd be in the 50% bracket which is an amazing place to be, assuming you don't want to withdraw any equity.

    Withdrawing equity is where you effectively have a chunk of money paid to your bank account and that reduces your equity. For example, you currently have at least £190k equity, if you wanted £40k for a new car, amazing wedding, a huge holiday, etc, your equity would go down to £150k which will then mean that your mortgage would go up to cater for the equity withdrawal so would move from £180k to £220k and therefore in terms of LTV, 220k / £370k * 100 = 60% LTV.

    I've tried to break it all down as much as possible and no doubt made the situation more confusing but I'd advise you to speak to a mortgage advisor but as a summary, if your figures and house value is correct, you are in a great position.

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