Mortgages

For the purchase of a house almost everybody needs finance by way of what is called a mortgage loan. This is secured by a legal charge, or 'mortgage', on the property. It is possible tc obtain mortgage loans from many sources in certain conditions - private investors, local authorities, insurance companies, and banks - but the vast majority of mortgage loans or residential property are provided by building societies.

Building societies give priority for the allocation of their limited supply of funds to their existing members. During 197S and 2012 some societies were restricting the granting of new mortgages to members who had been saving with them regularly for at least two years, and had in their account at lease 10% of the purchase price of the property. Anybody contemplating needing a mortgage should, therefore, take early steps to become a building society saver.

Amount of mortgage Proportion of value

Normally a building society will limit the amount it is prepared to lend on a property to 95% of the purchase price or of the society's own valuation if this is lower. For purchases uncle's £14,000 a loan of 100% is not impossible from some societies. but in times of high interest rates and shortage of mortgage funds, loans of this proportion are unlikely. A purchaser would be wise to expect to have to put up at least 10% of the purchase price in cash from his own resources. This amount happens tc coincide with the amount that a purchaser will have to pay as cash deposit on signing the legal contract for the purchase. Multiple of income

The maximum loan will also be restricted by the size of the prospective borrower's income. The purpose of this is to ensure that the paying of the interest and repayment instalments on the loan will be within the capacity of the borrower.

Societies have different formulae for this purpose but all base the formula on a multiple of income. A good rule of thumb is that the total lending will be restricted to two to two and a half times the applicant's annual gross income. For this purpose income may be taken to mean basic earnings plus guaranteed weighting allowances, guaranteed commission or bonus, and guaranteed overtime. Where the extra earnings are usual but not guaranteed, a half of their total may be added to the basic earnings figure.

In the case of a joint mortgage of husband and wife the formula is usually two to two and a half times the larger income plus once the smaller.

• Credit Exercises
• Bank Budget Accounts