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How does LTV changes affect remortgages?

  • 21-01-2021 12:29pm
    #1
    on_the_roots
    Registered Users, Registered Users 2 Posts: 211 ✭✭


    Let's say I bought a brand new (and overpriced, of course) house with market price at 420k, with initial LTV = 90% on 5 years fixed rate.
    So at the very beginning I have a balance of 378k on the mortgage (90% of market price).

    After the first 5 years on the fixed rate I will have an outstanding balance of approx 335k, to be remortgaged.
    At that moment, let's say the bank reevaluates the house worth only 320k. So it brings LTV to above 100%, well, I will be in negative equity.

    QUESTION 1: Being in negative equity would let me locked on the same lender, being forced to go to the variable rate (default after the fixed rate period ends)?

    QUESTION 2: When calculating the new LTV at remortgaging time, will the bank evaluate the entire property or just the constructed area (not considering the value of the land)?


Comments

  • #2
    Geuze
    Registered Users, Registered Users 2 Posts: 14,039 ✭✭✭✭Geuze


    In the case of neg equity, yes, you would be stuck with the same lender.

    But surely that lender's fixed rates would also be available?


    Q2 - LTV is based on the value of the property = house plus land.


  • #3
    on_the_roots
    Registered Users, Registered Users 2 Posts: 211 ✭✭on_the_roots


    I've seen many cases where properties have the bank's evaluation well below the selling price (50k to 100k less), and people saying this is just constructed area, excluding land. Not sure what this is for.


  • #4
    L1011
    Registered Users, Registered Users 2 Posts: 71,186 ✭✭✭✭L1011


    You are likely confusing the rebuild cost element of a valuation, which will nearly always be lower than the sale price. This is for insurance, not LTV calculation.


  • #5
    Q&A
    Registered Users, Registered Users 2 Posts: 571 ✭✭✭Q&A


    on_the_roots wrote: »
    QUESTION 1: Being in negative equity would let me locked on the same lender, being forced to go to the variable rate (default after the fixed rate period ends)?

    Being in "potential" negative equity wouldn't be great, this is true. The greater the value of equity in your house the more options and the cheaper the rates available. Negative equity mortgages are excluded from the central bank mortgage rules. So you're not completely locked out of the switching market. Of more relevance will be your ability to service the mortgage. If your loan to income is low banks will be more likely to look at you favourably. A low LTV is good for them in case they have to repossess but a low LTI is a good sign that you are less likely to default in the first place.

    The above really only relates to switchers. If you plan to stay with the same provider not all of them require a new valuation and will work off the original figure. Regardless I wouldn't see you limited to just variable rate mortgages. Those who were on arrears in 08-12 who had their loans sold did so at a time when fixed rates weren't the norm. So it's not fair to assume you would be excluded from fixed rates in the same way they are. But will likely depend on your mortgage provider keeping your mortgage and staying put in Ireland.
    on_the_roots wrote: »

    QUESTION 2: When calculating the new LTV at remortgaging time, will the bank evaluate the entire property or just the constructed area (not considering the value of the land)?

    They'll evaluate the total amount of land/property specified in the mortgage contract. In other words they will count anything they can reposse and sell based on the contract. As others have said rebuild cost will be lower than purchase cost as you don't have to buy the land again.


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