By: Tim Bennett
14.08.2018
14.08.2018
In the second video of his short series, Tim Bennett shines a light on three bits of important property market jargon.
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Property buying basics – part 2
One of the first battles many people face when they try to organise a property purchase is overcoming the jargon. In my second chapter of this short series, I tackle three of the more important terms. These are;
Loan to value
Also known as “LTV” this ratio matters because it will influence both your ability to borrow in the first place and to subsequently get the best mortgage deals. In a nutshell, this percentage captures the relationship between the proportion of a property that is financed using debt as opposed to homebuyer equity.
As a rule of thumb, the higher the LTV, the higher the rate on the associated mortgage. Further, some lenders will set a maximum level at which they are prepared to lend. Bear in mind that, because the value of a property can go up or down, LTV is a dynamic concept – in a falling property market it can limit some peoples’ ability to remortgage.
Gearing
Linked to the idea of LTV is gearing. This is also the relationship between the debt used to fund a property and the equity put in by the buyer/owner. It matters because the more debt you take on, the more “geared” you are (reflected in a higher LTV above). In a rising market gearing (or “leverage”) can increase the value of your equity quickly, however, the reverse is true when property prices fall. Whether high gearing is therefore a good, or bad, thing is therefore subjective.
Negative equity
If the value of a home falls to the point where it is below the level of any mortgage loan secured on it, the situation is referred to as negative equity. Were the property to be liquidated, the buyer would not recover sufficient funds to repay their lender. For that reason, some lenders will limit both moving and remortgaging should a borrower falls into “neg eq” as property agents sometimes call it.
Top tips
Bearing all this in mind, I would offer the following guidelines to first time buyers;
The bigger your deposit, the better your chances of both securing a good mortgage deal and avoiding negative equity. However, when working out what you can afford as a deposit, don’t forget to set aside enough funds to meet all of the costs of a property transaction. We’ll look at these in more detail in Part three of this short series. In the meantime, please speak to an Investment Manager or Wealth Planner on any of the points covered here.
