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Mortgages: How Much Can You Borrow?

Buying a house is an expensive business! Make sure you get an good idea of how big a mortgage you can get before you start house hunting.

Okay - so you've decided to get your foot on the housing ladder. You're fed up with having to ring up the landlord because the shower has gone wrong yet again. The view of everyone else's dustbins from your kitchen window is beginning to get to you. So what happens now?

First of all, buying a house or flat is an expensive business so it's a good idea to work out whether you can afford to borrow enough to get on the local property ladder in the first place.

Salary Multiples

Generally speaking, a mortgage lender will lend you between three and four times your gross salary, although some lenders will offer you more if you're willing to pay a higher interest rate. If you're buying with a partner then they'll probably throw in the equivalent of his or her annual salary in addition to the amount they're prepared to lend you. So, if you're on £25,000 a year and he or she is on £20,000, you should be able to borrow around £120,000. Alternatively, they may lend you three times your joint income. This usually means you can raise a slightly bigger mortgage. Using the same salary figures, you could borrow £135,000 on this basis. If you get any additional income from bonuses or commission these may be taken into account as well.

In recent years, there has been a shift towards looking at affordability, rather than just considering salary multiples. A lender will look at your bank statements and your regular outgoings and calculate how much they will lend you. If you run a tight ship with regard to your finances, you may be able to get a bigger mortgage than you would do under the traditional salary multiple guidelines. Conversely, if you're already 'maxed out' with credit cards and personal loans, you may not get offered as much.

Deposits

The next thing to think about is the deposit you'll need to buy the house. Usually a mortgage lender will loan you up to 95% of the value of the property which means you'll have to come with the rest. If you want to buy a house worth £100,000, you'll need a deposit of £5,000 and so on. Do you have any savings that you can use? Can you raise the money by other means, if you haven't? Can your parents help?

There are certainly lenders who will give you a 100% mortgage but you're likely to pay over the odds on the interest rate because you'd clearly be a bigger risk. After all, if you default on the mortgage, they'll want to be sure that they can get their money back in full.

The larger the deposit you put down, the lower the rate of interest you are likely to get. A larger deposit also reduces the risk of you going into "negative equity". This is the nasty situation when the value of your house falls to below that of your mortgage. This makes it difficult to move house as if you sell up the proceeds won't cover the mortgage, and you would need to find additional funds from elsewhere.

Other costs

Another consideration is the various costs associated with buying a home. It's not just a case of finding the deposit and knowing how much your mortgage payments will be each month. The moment you've found the home of your dreams and have had your offer accepted, you'll find that lots more people come crawling out of the woodwork to mug you for all sorts of additional expenses. The least of these is working out how to move your furniture from one place to another.

The main things you need to think about are valuation, survey and legal fees (probably in the region of £1,000 to £1,500), as well as the dreaded stamp duty. We'll have a look at the first three in more detail later but, since the stamp duty may well be the biggest single expense of buying a home, you might as well know the bad news now.

Stamp Duty

Stamp duty is payable to the Chancellor of the Exchequer whenever you buy a house valued at over £125,000. Yes, it's a tax you pay for the privilege of buying your own home!

It works on a sliding scale like this:

Value of your property
£125,000 or less: Nil
£125,001-£250,000: 1%
£250,001-£500,000: 3%
£500,001 or more: 4%

So, be aware that you may need to find several thousand pounds for the deposit, fees and stamp duty - just to get started on buying your own home. The next step is to assess your monthly income and expenditure. Just because someone is prepared to lend you the money, that does not mean you will necessarily be able to afford it!

Home Equity Loans

Do you own your home? If so, it's likely to be your greatest single asset. Unfortunately, if you agree to a loan that's based on the equity you have in your home, you may be putting your most valuable asset at risk.

Homeowners-particularly elderly, minority and those with low incomes or poor credit-should be careful when borrowing money based on their home equity. Why? Certain abusive or exploitative lenders target these borrowers, who unwittingly may be putting their home on the line.

Abusive lending practices range from equity stripping and loan flipping to hiding loan terms and packing a loan with extra charges. The Federal Trade Commission urges you to be aware of these loan practices to avoid losing your home.

We urge you to consider all the facts here. What if the value of your home plummets? It looks like in 2007 real estate prices will correct, if not take a dive.

Real estate is not what it used to be. Getting a HOMEEQUITYLOAN might be very risky.adverse credit remortg ageadverse credit remortgage

Home Equity Loans

Home equity loans are an attractive borrowing tool for many people. After all, the interest is tax deductible, the rates are usually lower than those on other types of loans, and they're easy to obtain. But there can be a downside, and you should know what it is.

With a home equity loan or line of credit, you can borrow up to 80% of the equity in your home. For example, if your home is valued at $125,000 and your mortgage balance is $50,000, you could borrow up to $60,000 (80% of your $75,000 equity).

Home equity loans should not be used lightly. Keep in mind that you're putting your home up as collateral on the loan. If you fall behind on the payments, you could lose your home through foreclosure, where the lender takes ownership of the property and sells it in an attempt to recoup the money they lent you.

Many people refinance their mortgage or take out a home equity loan to take advantage of the equity in their home. They then use the money for purchases, vacations, and other expenses, counting on the house appreciating in value to cover these expenditures once they sell. If it doesn't, they owe more than the house is worth and are "upside down" on their loan.

Being "upside down" on your loan means that you owe more than your home is worth, and this can easily happen if real estate values fall. If you try to sell your home under these circumstances, you will incur losses that you will have to pay for out of your own pocket when you pay off your mortgage at the time of the sale. This can cause severe financial hardship or can force you to stay in a house you no longer want to live in.

Just because you have equity in your home doesn't mean you can afford the monthly payments of an additional loan. Be sure to do a careful analysis of whether the home equity loan payments fit comfortably into your budget.

Home equity loans are best used for home improvements that will increase the value of your home. Some improvements, such as swimming pools, don't usually increase the value upon resale. Others, such as additional bathrooms, living space, renovated or updated kitchens, etc., generally do increase the value of your home.

The bottom line is this: if your home is worth more than you owe on it, a home equity loan can be a great way to take advantage of this, but it can also get you into serious financial trouble, and should be used wisely. Why not use the equity in your home as part of your retirement fund instead of spending it on things that may not last?