Some
mortgage
lenders will allow you to borrow more than the value of
your chosen property.
They may let you have a loan of anything up to 125 per cent
of a surveyor's valuation.
This can be very attractive if you have limited
savings to cover solicitor's and surveyor's fees, stamp duty
and moving in costs.
And because you have the entire mortgage
term to repay the debt, borrowing a
few thousand pounds extra may not add hugely to your monthly
payments.
The true cost of a high LTV
But signing up for a high loan to value or LTV can be far more
expensive than you realise.
Lenders often reserve their best interest rates
for loans with more modest LTVs such as 80 per cent and below
so you can expect to pay slightly more to borrow at this level.
The majority will also slap on an additional lending fee if
you take more than 90 per cent of valuation.
These go by several names your lender may describe it as a higher
lending charge (HLC), mortgage indemnity guarantee (MIG), additional
security fee or mortgage advance premium.
Whatever it's called, it boils down to the same thing: you are
being charged extra for the privilege of borrowing above a certain
level.
The way lenders calculate these charges varies, but for someone
borrowing 100 per cent on a property valued at £150,000, around
£3,000 would be typical.
Remember, too, that you will be paying interest
on that extra cash.
And over a full mortgage term that soon mounts up.
How the figures stack up
Imagine you're buying a property valued at £150,000 with a repayment
loan.
If you borrow 89 per cent of valuation, or £133,500,
you will avoid a higher lending fee and might be charged interest
at, say, 6 per cent a year.
On this basis, you will pay £860.14 a month, or £258,042
over the full 25 years.
But if you go for a 100 per cent LTV, giving you £150,000,
you might face a £3,000 higher lending charge and a higher interest
rate for example, 6.5 per cent.
This will cost you £1,033.06 a month, or £309,918
over 25 years.
At this rate, go for a 125 per cent LTV, or £187,500,
plus an HLC on a loan of this size typically £6,000 and you
will face a monthly payment of £1,306.52, giving a 25-year total
of £391,956.
In other words, borrowing £37,500 more than your
valuation will actually cost you £82,038.
Keeping your costs down
that's why it's much better to try to save the extra cash you
need.
If you can't manage this, investigate borrowing interest-free
(or at low rate) from your family.
Or, if you have no other option, consider a low-cost, unsecured
personal loan over the shortest repayment term you can manage.
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