Homeowners who bought utilizing a 95% mortgage could save hundreds of pounds a month using the equity in their properties to remortgage to a cheaper rate.
The gap on price between your cheapest two-year fixed-rate deals at 70% and 85% loan-to-value (LTV) has narrowed to just 0.2% this month, down from 0.35% last year.
This means low-deposit buyers can make the most of the equity they’ve gained within their homes through mortgage payments and house price increases to switch to some lower LTV at the end of their fixed terms.
Here, we explain how to sort out how much of your mortgage you’ve paid off, and provide suggestions about while using worth of your house to switch to a better deal.
Fixed-rate mortgages: how much have I paid off?
If you got a 95% mortgage when buying your property, you might be wondering just how much equity you’ve developed in your property on your fixed-term.
In the initial few many years of paying down a home loan, the majority of your mortgage payments are accustomed to pay the interest in your loan, meaning the quantity of capital you pay off will be relatively low.
Let’s say you purchased your first home for lb200,000 with a 5% deposit (lb10,000) and took out a 30-year mortgage term, as is now common for first-time buyers.
In the tables below, we’ve based our calculations on a type of loan of 3.2%, the present average rate for any two-year fixed-rate 95% mortgage (according to data from Moneyfacts).
|Year||Opening balance||Annual interest||Capital repayment|
At the end of your two-year fixed-rate period, you’ll have paid off lb7,797 of the lb190,000 mortgage.
That means you’ll have developed an additional 4.1% equity in your property, taking your overall equity to 9.1% (as well as your 5% deposit).
While this means you own more of your property, you won’t have paid off enough to move to a lower 90% loan-to-value deal when you remortgage, where home loan rates are lower.
This is where growth in your property’s value might help.
How house prices affect your equity
One of the biggest benefits of remortgaging is to take advantage of a rise in the value of your house to obtain a rate plan. Your ability to do this, of course, depends upon house prices going up.
Over yesteryear decade, homeowners have generally taken advantage of high ‘capital growth’ – the increase in capital worth of property – although the market has begun to cool over the last 12 months. What can happen to values over the years to come is in the air.
We don’t possess a crystal ball, to give you an idea of the effect of house price growth on remortgaging deals, we’ve used historic data in the Office for National Statistics (ONS) to model the impact of property price growth.
Remortgaging from 95% to 85%
In yesteryear two years, the average sale cost of a first-time buyer property in England has grown by 7.5%, according to the ONS.
So, let’s the lb200,000 house you purchased two years ago has become worth lb215,000.
When you come to remortgage, you’ll have lb182,203 left in your current mortgage (the original lb190,000 loan minus your capital repayments of lb7,797), but on the home that’s now worth lb215,000, instead of lb200,000.
This implies that when you apply for a new deal, you’ll have equity of approximately 16.5% (5% deposit, plus 4.1% in repayments and seven.5% capital growth)
This level of equity will theoretically permit you to replace your 95% LTV cope with an 85% mortgage.
Remortgaging at a lower LTV – best rates
Why performs this matter? Mortgages at 85% LTV tend to be more attractively priced than 95% deals like the one you initially got.
And the gap on price between 70% and 85% deals has closed significantly within the last year, meaning it’s a great time to shift right into a lower bracket.
The chart below shows the cheapest initial rates on fixed-rate products at 85%, 90% and 95% LTV.
As you can observe, theoretically, you could obtain a new two-year fix just 1.67%, 1.5% less expensive than your current mortgage.
How much would you save?
In the first two years of owning your house, you’ve been paying just over lb896 a month – assuming that you paid any up-front fees in one go, instead of adding these to your mortgage.
So, let’s take a look at what you’d pay if you remortgaged to the cheapest two-year fix, as shown above.
|Lender||Product||Initial rate||Revert rate||APRC||Fees|
|Leeds Building Society||Two-year fix (85% LTV)||1.67%||4.69%||5%||lb1,999|
With this deal, your monthly repayments throughout the first couple of years would be just below lb680 a month, though they’d skyrocket to in excess of lb1,000 per month after the promotional period (though we’ll assume you’ll remortgage again before getting to your lender’s SVR).
Overall, which means that during the fixed term, you'd save over lb200 every month.
The price of up-front fees
As ever, there's a catch. The Leeds deal above comes with a fee of lb1,999 – which may give a significant chunk onto your outlay.
With remortgaging deals, there’s always a trade-off between best rates and up-front fees, but it's easy to look for a deal priced below 2% without product fees. Which comes from Mailbox Money, as shown below.
|Product||Initial rate||Revert rate||APRC||Fees|
|Post Office Money||Two-year fix (85% LTV)||1.99%||4.74%||4.4%||None|
This deal would cost you around lb28 a month a lot more than the Leeds product, however, you may take into account that a worthwhile sacrifice to prevent the large up-front fee.
Is it worth overpaying to get a better deal?
If you’re looking to the near future and want to cut the LTV you can remortgage to, it’s often easy to make overpayments on your current mortgage.
While overpaying might mean you have to pay more each month, you could save money in the long run.
Use our mortgage overpayment calculator to find out just how much you could save.
It’s best to do your research before rushing in, however, as the lowest rate on the 70% deal is now only 0.2% less expensive than a 85% deal, shown within the table below.
This is within stark contrast to January this past year when the gap stood at 0.35%.
Therefore, you could still achieve substantial savings without overstretching yourself to make significant mortgage overpayments.
|1.47% (Sainsbury’s Bank)||1.47% (Sainsbury’s Bank)||1.55% (Hanley Economic Building Society)||1.67% (Leeds Building Society)|
Should I use my equity to chop my overall term?
In the earlier example, we assumed you started off with a 30-year mortgage term and, at the end of your two-year deal, you remortgaged on the 28-year term, keeping the general duration exactly the same.
While carrying this out can provide excellent savings, you can turn to pay off your home loan quicker by reducing your term.
If you got that Post Office deal we mentioned earlier, you can theoretically reduce your term to Twenty five years for lb63 a month more.
|Term||Monthly payment throughout the introductory period|
Advice in your mortgage options
If you’re thinking of remortgaging, it may be helpful to get some advice from a whole-of-market mortgage broker, who are able to help you find the best deal for the circumstances.
Note: All mortgage data sourced from Moneyfacts