Homeowners who bought using a 95% mortgage could save hundreds of pounds a month by using the equity in their properties to remortgage to a cheaper rate.
The gap in cost between the 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% a year ago.
This means low-deposit buyers can make the most of the equity they’ve gained in their homes through mortgage payments and house price increases to switch to a lower LTV at the end of their fixed terms.
Here, we explain how to work out how much of your mortgage you’ve paid off, and offer advice on using the value of your home to switch to a better deal.
- If you’re thinking of remortgaging, you can get impartial, expert advice on your options by calling Which? Mortgage Advisers on 0800 197 8461.
Fixed-rate mortgages: how much have I paid off?
In the first few years of paying off a mortgage, the majority of your mortgage payments are used to pay the interest on your loan, meaning the amount of capital you pay off will be relatively low.
Let’s say you bought your first home for £200,000 with a 5% deposit (£10,000) 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 mortgage rate of 3.2%, the current average rate for a 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 £7,797 of your £190,000 mortgage.
That means you’ll have built up an extra 4.1% equity in your property, taking your overall equity to 9.1% (including 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 mortgage rates are lower.
This is where growth in your property’s value can help.
- Find out more: To learn more about payment structures, check out our guide on how mortgage payments work.
How house prices affect your equity
Over the past decade, homeowners have generally benefited from high ‘capital growth’ – the increase in capital value of property – though the market has begun to cool over the last 12 months. What might happen to values over the next few years is very much up in the air.
We don’t have a crystal ball, so to give you an idea of the effect of house price growth on remortgaging deals, we’ve used historic data from the Office for National Statistics (ONS) to model the impact of property price growth.
Remortgaging from 95% to 85%
In the past two years, the average sale price of a first-time buyer property in England has increased by 7.5%, according to the ONS.
So, let’s say the £200,000 house you bought two years ago is now worth £215,000.
When you come to remortgage, you’ll still have £182,203 left on your current mortgage (the original £190,000 loan minus your capital repayments of £7,797), but on a home that’s now worth £215,000, rather than £200,000.
This means that when you apply for a new deal, you’ll have equity of just over 16.5% (5% deposit, plus 4.1% in repayments and 7.5% capital growth)
This level of equity will theoretically allow you to replace your 95% LTV deal with an 85% mortgage.
Remortgaging at a lower LTV – best rates
Why does this matter? Mortgages at 85% LTV are much more attractively priced than 95% deals such as the one you initially took out.
And the gap in cost between 70% and 85% deals has closed significantly in the last year, meaning it’s a great time to shift 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 see, in theory, you could obtain a new two-year fix at just 1.67%, 1.5% cheaper than your current mortgage.
How much would you save?
In the first two years of owning your home, you’ve been paying just over £896 a month – assuming that you paid any up-front fees in one go, rather than adding them to your mortgage.
So, let’s have 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%||£1,999|
With this deal, your monthly repayments during the first two years would be just under £680 a month, though they’d shoot up to over £1,000 a month after the introductory period (though we’ll assume you’ll remortgage again before moving on to your lender’s SVR).
Overall, this means that during the fixed term, you would save over £200 each month.
- Current monthly mortgage repayment: £896
- New monthly mortgage repayment: £680
- Monthly saving: £216 a month
- Annual saving: £2,592
The cost of up-front fees
As ever, there is a catch. The Leeds deal above comes with a fee of £1,999 – which would add a significant chunk on to your outlay.
With remortgaging deals, there’s always a trade-off between best rates and up-front fees, but it is possible to find a deal priced below 2% without product fees. That comes from Post Office 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 £28 a month more than the Leeds product, but you may consider that a worthwhile sacrifice to avoid the large up-front fee.
- Current monthly mortgage repayment: £896
- New monthly mortgage repayment: £708
- Saving: £188 a month
- Annual saving: £2,256
Is it worth overpaying to get a better deal?
If you’re looking to the future and want to cut the LTV you can remortgage to, it’s often possible to make overpayments on your current mortgage.
While overpaying might mean you pay more every month, you could save money in the long run.
Use our mortgage overpayment calculator to find out how much you could save.
It’s best to do your research before rushing in, however, as the lowest rate on a 70% deal is now only 0.2% cheaper than a 85% deal, shown in the table below.
This is in stark contrast to January last 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 cut 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 a 28-year term, keeping the overall duration the same.
While doing this can offer excellent savings, you could look to pay off your mortgage loan quicker by reducing your term.
If you took out that Post Office deal we mentioned earlier, you could theoretically cut your term to 25 years for £63 a month more.
|Term||Monthly payment during the introductory period|
Advice on your mortgage options
If you’re thinking of remortgaging, it can be helpful to get some advice from a whole-of-market mortgage broker, who can find you the right deal for your circumstances.
For impartial, expert advice on your options, call Which? Mortgage Advisers on 0800 197 8461 or fill in the form below for a free callback.
Note: All mortgage data sourced from Moneyfacts
Your home may be repossessed if you do not keep up repayments on your mortgage.
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