It will depend upon the type of mortgage finance you are looking for, residential, buy to let, etc, as to the maximum LTV ratio. While 100% mortgages are starting to creep back into the market they are certainly not commonplace. So, how do you maximise your LTV ratio while maintaining a degree of safety going forward?
Value of property
If you are on a relatively high income and decide to go for a relatively modest property then you should have significant “spare” income each month. In simple terms, the greater the difference between your mortgage liability and your monthly income the more content your mortgage lender will be. In simple terms this means that there is less risk that you will default and the bank lose money on your transaction.
Additional collateral
It is unfair to suggest there are no traditional mortgage lenders who would go above and beyond the average LTV ratio but they are few and far between. The vast majority of relatively high LTV ratio mortgages tend to go through private banks and other similar institutions. These lenders will allow additional collateral to be tagged onto a mortgage loan which gives a greater degree of security going forward. Even some extremely wealthy investors can be asset rich but cash flow poor.
Property investment experience
While not necessarily published far and wide, you will find that many mortgage companies would prefer a degree of experience when considering for example a buy to let mortgage. This makes perfect sense, if somebody has a good track record in property investment then this demonstrates that they know what they are doing and are deemed a “lesser risk”. That is not to suggest that new entrants to the buy to let market, as one example, are not skilled but they just don’t have a proven track record.
Assets under management
In a similar vein to additional collateral, many private banks will offer (in some circumstances) mortgage LTV ratios approaching 100%. Now, before you start ringing the financial regulator, and suggesting these banks are taking excessive risks, this is not the case. Very often they will insist on the applicant transferring an array of assets to their asset management division. The client will still own the assets, and receive the income, but they will remain as part of the mortgage company’s asset management division for the duration of the loan. Again, this is a type of insurance which gives the mortgage lender a degree of certainty in the event that the client has financial issues in the future.
Deposit 12 months of interest
Again, in a similar fashion to assets under management, some private banks will insist on holding a minimum 12 months of interest payments in a separate account. Obviously, if the individual was to experience financial issues then there would be enough money put aside to cover interest payments for the next 12 months. It would also give the customer time to “get back on track”. This obviously relates directly to interest only mortgages where the capital is repaid at the end of the term.
Summary
Whether looking at buy to let mortgages, commercial mortgages or residential mortgages, the principles are the same. The greater the degree of headroom between a client’s mortgage liabilities and their income/assets the safer the transaction is deemed. Researching LTV ratios and mortgage interest charges, you will notice that relatively low LTV ratios attract lower interest rates compared to more ambitious LTV ratios. That in a nutshell is the main issues associated with LTV ratios and how to maximise your mortgage funding.