LTV stands for Loan to Value. This calculation is used to show the difference between the value of the property and the mortgage taken out to buy it. It is also used to calculate deposits. So, for example, if a borrower has ?20,000 to use as a deposit on a purchase of a house that costs ?100,000 then they will need to borrow ?80,000. The LTV calculation is the loan divided by the price -- here that would be ?80,000 divided by ?100,000 so the LTV would be 80%. LTVs are often used by lenders as a guide to deals -- for example the 5.69% deal outlined earlier has a maximum LTV of 75%.
What is an Early Redemption Penalty?
If a borrower tries to change their deal or repay their mortgage when committed to a fixed rate deal then the lender will usually charge an Early Redemption Penalty. Some fixed rate deals have penalty periods that exceed the actual length of the fixed term deal. In most cases these fees are calculated as a percentage of the mortgage taken out and will usually decrease during the duration of the deal year on year.
What are the pros and cons of fixed rate deals?
Fixed rate deals often suit first time buyers or people who need to work to a specific budget. The advantage here is that the mortgage payment will remain the same every month so it is easier to budget. And, if base rates go up, the mortgage payment will not reflect these rises and will stay the same.
But, if base rates fall, this will also not change the mortgage payment which could leave the borrower paying more than they need to every month. And, of course, if they try to change deals they may well have to pay the penalty fees.
What are the key considerations
Shop around -- individual lenders can only give advice on their deals so look at Internet sites or brokers to find the cheapest deal.
Check for fees -- some fixed rate deals will come with upfront fees.
Check the APR -- look for the APR rate rather than starting interest rates as this gives a true consideration of actual costs.
Look for tie-ins -- some fixed rate deals that tie-in past the deal period may be cheaper but consider the penalty costs if there is a chance of early redemption.
Think about time -- some fixed rate deals last from a year and some can last for 10 years+ so think about how long you are comfortable being tied in for.
Conclusion
Do as much research and preparation as possible before choosing the right deal.
A fixed-rate mortgage is a mortgage on which the interest rate is set for the term of the loan. Your interest rate stays the same for the term of the mortgage or for a specified period of time. Most people use a fixed-rate mortgage. In fact, about 75 percent of all home mortgages have fixed rates. The main advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it.
A Fixed Rate mortgage will offer you the security of knowing that your mortgage interest rate will not change during the term of your fixed rate. For example, a lender can offer a 30-year fixed loan to a homebuyer at a 6.5% interest rate. The loan is locked in to the 6.5% interest rate, even if the market interest rate rises to 8.0%. Conversely, if the market interest rate decreases to 4.5%, you will continue to pay the 6.5% interest rate. A Fixed-Rate Mortgage applies the same interest rate toward monthly loan payments for the life of the loan.
Features:
- Straightforward and easier to understand than Adjustable Rate Mortgages (ARMs).
- More secure for the buyer and very popular with first-time home buyers.
- Ideal for anyone who likes to budget monthly expenses and plans to keep their home for several years.
- Since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than Adjustable Rate Mortgages (ARMs).
- Tend to have higher initial monthly payments compared to those of adjustable rate mortgages.
- Fixed-rate mortgages are less flexibility than adjustable rate mortgages.
With adjustable rate mortgages the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. The advantage of an Adjustable Rate Mortgage is that you may be able to afford a more expensive home because your initial interest rate will be lower. In a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage.
Both Hugo R Brin & Chileshe Mwape are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Hugo R Brin has sinced written about articles on various topics from Real Estate, Pilates Exercise and Business Plan. Hugo Brin writes regularly on consumer, financial and business matters.You can find impartial advice and further information on a