Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
How much you need to borrow is one of the factors you need to consider when deciding which type of loan is best for you. The amount a lender will let you borrow is another matter, however, and depends on a range of factors.
When you apply for any loan, lenders have to make sure you’re likely to be able to repay the amount you want to borrow. That’s part of the responsible lending rules of the Financial Conduct Authority (FCA), which regulates consumer credit.
Lenders assess what you can afford based on your income and expenditure, which can be estimated, and your credit history. These elements determine whether they will lend to you and if so how much you can borrow.
To check whether you are creditworthy, lenders are likely to ask for the following:
Proof that you are 18 or over and a UK resident
Proof of identity and address
Evidence of your employment status
Evidence of your income
FCA mortgage rules, which also apply to other loans secured on your home, require lenders to look at your expenditure as well as your income to check whether the loan you want is affordable. Mortgage lenders will often ask you to provide bank statements and evidence of where your deposit is coming from.
Your credit reports are a record of your borrowing and repayment history. They show lenders your track record of taking out credit and therefore whether you’re likely to pay back any loan they grant you. The three main UK credit reference agencies that hold this data are Experian, Equifax and TransUnion. Lenders may look at data from any or all of them.
Information in your credit reports includes what credit you’ve taken out in the past, such as credit cards, loans or mortgages, how much you’ve borrowed, how much you still need to pay off and whether you made all the repayments on time.
They also show whether you’ve defaulted on a credit agreement, missed payments, had county court judgments (when court action is taken against you because you owe money) or been declared bankrupt. Negative information will disappear from your credit reports after six years, unless your bankruptcy restrictions are extended beyond this.
When you apply for a loan, lenders will look at this and other information to decide the level of risk they would be taking on if they accept you as a borrower. This will affect whether they will lend you the amount you want as well as the interest rate you’ll pay – the riskier the lender thinks you are, the smaller the loan you can get is likely to be and the more it will cost you.
Each lender will have its own way of judging the risk borrowers represent and their criteria for accepting those risks. This means if you’re turned down by one lender, you could still be accepted by others.
Applying for lots of credit in a short space of time may harm your credit score as this can make it look like you’re in financial difficulty. However, there are online tools that let you check whether you’re likely to be accepted for a loan before you apply without affecting your credit score.
It’s a good idea to regularly check your credit reports, which you can do for free with some services, to make sure they don’t contain mistakes that could damage your chances of getting a loan.
You can read more about how your credit record affects the loan you get.
With an unsecured loan, also known as a personal loan, you can usually borrow between £1,000 and £25,000 although it’s possible to get more. You can borrow up to £50,000 with some banks if you are an existing customer or hold a certain type of account with them.
For example, the AA and the Post Office, which currently offer some of the cheapest personal loans available, will only lend up to £25,000. With Tesco Bank, on the other hand, you could borrow up to £35,000 and First Direct will lend up to £50,000 to its current account customers.
With secured loans you provide an asset, usually your home, as security for the loan. You can borrow more with a secured loan than with an unsecured loan and they are cheaper for borrowing larger amounts. This is because the lender can sell the asset to get its money back if you can’t repay the loan, so lending to you is seen as less risky.
You can usually borrow between £10,000 and £1 million with a secured loan but some lenders will only lend a maximum of £125,000 or even less depending on the product.
In addition to questions of affordability and whether you are likely to pay back the loan, lenders will also determine the size the loan you can get by according to the maximum loan-to-value (LTV) allowed. .
LTV is the proportion of the property’s value you can borrow. It can range from 50% to 95%. If you already have a mortgage on the property, however, the balance outstanding will be taken into account.
Lenders will carry out a valuation of your property to make sure it’s worth enough to provide adequate security for the loan. This is another factor that will affect whether you can borrow the amount you want and the size of the loan you’ll ultimately be offered.
Secured loans are also known as homeowner loans and second charge mortgages.
Find out more about how secured and unsecured loans work.
Mortgages are normally taken out to buy a property. How much you can borrow depends on the maximum loan-to-value allowed, which will vary for different deals. The most you can borrow with a standard mortgage is 95% of the property’s value, so if you’re buying a home for £200,000 you’ll be able to borrow up to £190,000 and will have to put down a 5% deposit.
It’s possible to borrow up to 100% with a guarantor mortgage. This is where someone, usually your parents or another relative, guarantees to make your mortgage repayments if you can’t. This gives the lender added confidence that it will get its money back, making it more willing to lend you all the money you need.
The lower the LTV the lower the rate you’ll usually pay, so it’s worth trying to save up as big a deposit as possible. For example, if you were borrowing 95% you could get a two-year fixed rate at 2.45% at the time of writing. But you could pay far less,just 1.43%, if you were borrowing 80% of the property’s value.
Make sure you also take set-up fees into account as well as the interest rate when searching for the best deal and look at how much it will cost you over the initial deal period. Once the introductory offer is over, it’s usually best to switch to a new deal. The fees could mean that a deal with a lower interest rate will end up costing you more overall than one with a higher rate.
As with a secured loan, the lender will carry out a valuation of the property to make sure it’s worth enough to provide the security it needs to for you to borrow the amount you’ve applied for.
If you need to borrow more money once you’ve bought your home – to pay for renovations, for example – borrowing more on your mortgage could be cheaper than taking out a secured or personal loan so it’s worth exploring this option first.
If you’ve had credit problems in the past - such as missing payments, defaulting on loans or having county court judgments against your name - it iss still possible to get a loan but you probably won’t be able to borrow as much as if you had a good credit history as lenders will view lending to you as a riskier prospect. It will also cost you more.
If you’re taking out a personal loan, you might be limited to £15,000. With a secured loan or mortgage, the maximum LTV you can borrow is likely to be lower, depending on the severity of the credit problems you’ve had. Different lenders will accept different levels of bad credit while some won’t lend to people who’ve had credit problems at all.
It’s a good idea to speak to a specialist broker if you have a poor credit rating as they will be able to look at the whole available market to help you find the size of loan you need at the best rate.
When you’re taking out a loan, the smaller the amount you borrow and the shorter the period you borrow it for, the cheaper it will be, so don’t borrow the maximum available just because you can.
Think carefully about the size of loan you should apply for - if you don’t borrow enough, getting another loan later could end up costing you more than if you borrowed it all in one go as there may be set-up fees to pay.
It’s also worth noting that smaller loans tend to have higher interest rates than larger ones.
That means if you’re close to one of the lending thresholds - typically £3,000, £5,000 or£7,500 - you might save money overall by borrowing a little bit more to take you to the next level.
Just make very sure the sums add up before asking for extra cash because you’ll be charged interest on everything you borrow.