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Mortgage Equity


Owl
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Just a quick question regarding mortgages, I've tried looking online and I think I understand it right.

If I buy a house valued at £75,000 and I want to borrow for £50,000.

As there is £25,000 equity does this mean I won't have to pay a deposit?

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Just a quick question regarding mortgages, I've tried looking online and I think I understand it right.

If I buy a house valued at £75,000 and I want to borrow for £50,000.

As there is £25,000 equity does this mean I won't have to pay a deposit?

The £25,000 is your deposit.

So you would have a 66% LTV mortgage

Edited by MerseyLLB
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Right, but I don't have to actually pay them £25,000 do I?

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eh?

The house costs £75,000. The lender will lend you £50,000 to buy the house and your LTV is 66%. I am Tim, the owner of the house. £50,000 of the asking price comes from the lender. Where do I get paid the extra £25,000 from?

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The better your loan to value, the less risk for the lender. Should you default, it's likely to be an easier sell for the lender and they're more likely to get their money back (sadly you don't get much say on what it gets sold for). That flipside of that is, because the risk is less, the rate's are better, because the lender needs to make more money to set aside the cost of the risk. Cost of the risk? What does that mean? It means that the lender has to put some money aside in case you default and it has to be ring fenced so they can't perhaps use it to make more money (by further investing it). So if they lend you £50,000 they might have to stick £2000 aside. Ideally, as they're usually banks, they want to turn that £2000 and turn it into £2,500 but they can't. Hence, why the riskier you are, the worse the interest rates, because you're costing them more money. :aok:

(This is a bit of an oversimplification but that's why a good LTV is a good thing)

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