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Borrowing More Than the Property Value

By: Emma Eilbeck BA (hons) - Updated: 1 Dec 2010 | comments*Discuss
Ltv Mortgage Borrow Lender First-time

Lenders have hit the headlines in the past when they have offered first-time buyers mortgages that exceed the value of the property, with people accusing lenders of being irresponsible with their borrowing.

Some lenders have gone as far as offering 130% LTV, which means you are borrowing 30% more then what the property is worth, which means you are in negative equity from day one of your mortgage.

Despite its critics, mortgages that offer up to 130% LTV do have their advantages if used correctly, they can give first-time buyers a huge advantage and offer you some assistance when it comes to house buying costs such as Stamp Duty, legal fees or any home renovations that might need doing.

The Risks Involved

If you are thinking about borrowing more than the property’s value it is important to understand what type of deal you are getting. Some mortgages that offer over 100% LTV will act as a normal mortgage. Another option is for the extra say 20% or 30% over the property's value to be added on as either a secured loan against the property, or even the reverse, an unsecured loan.Other deals will just be a straight 120% or 130% LTV deal and the extra money will be topped onto your mortgage.

The most important thing to remember, whichever option you choose is that you will always be in negative equity, and unless your house shoots up in price, it will be a long time before you actually start paying off the balance of your property.Borrowing extra money on top of the house value may sound like a good idea, but lenders are very cautious about this type of lending and will not offer it to everyone who applies.You will have to show that you can pay back the money and you might also have to show what the extra money will be used for.

A lender might not be so keen to lend you the money if you are going to use the extra 30% to pay off existing debts, however if you plan to use it for an extension for the property then they might be a bit more understanding.

If is also worth remembering that if you do miss any payments and things go wrong then you could not only have your house repossessed but you will also owe the lender any additional borrowings.You will inevitably be pay a higher interest rate because you have borrowed more money. If you can’t already afford to save up a deposit for a property then it is worth questioning whether you will also be able to afford to higher mortgage payments and be able to pay back more than most people.

It is worthwhile looking at your options before you consider taking out over 100% of the property’s value. It does not leave you in an ideal position and you could be paying off very high mortgage payments for a long time to come.

Despite its faults, borrowing over 100% LTV is an attractive offer and one that eases a lot of first-time buyers into the housing market, so it may be worth it, as long as you can stomach the hefty repayments in the future.

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