Money: Be at home with an extra loan

You have the home you want, but can see ways of improving it. The list is long; new bathrooms, kitchen, garages, loft conversions, even extra floors. Iain Morse guides you through the maze.

If you have enough money, then paying for improvements is not a problem. Most of us are not in this happy position though. We have to borrow.

There are several types of loan, each with its particular terms and costs. Shop around for the best deal, but also consider long-term consequences for your financial planning.

One place to start is the basis on which you borrow. Lenders offer secured or unsecured loans. Accepting a secured loan gives the lender a legal charge over your home. If you cannot repay the loan, the lender can recover the amount owed by taking legal action to force the sale of the property.

Mortgages and secured home improvement loans are given on this basis. Most improvement loans are given by lenders to existing mortgage- holders, although some will lend to those who have a mortgage elsewhere.

Banks and building societies will decide how much you can borrow in aggregate, taking account of your earnings, employment status, how much you can afford from net income, and your borrowings relative to the value of your house.

The maximum you can borrow will normally be decided as a multiple of earned income, the the ways vary. The Royal Bank of Scotland will lend up two-and-a-half times joint salaries. Barclays' Mortgages will lend on this basis, or on three times one salary, plus one times the second. Both impose a limit for single borrowers of three times their salary.

But Andrew Stinson, head of Barclays' mortgage information department, adds: "We will certainly consider going above these limits in some cases. If you are in a profession, or can demonstrate likely future earnings growth, we are happy to be flexible."

Anyone self-employed should be able to borrow up to the same limits as the employed, but must have proof of earnings. Copies of tax returns over the previous two to three years should be adequate.

Mr Stinson points out that other factors may come into play. "We will take account of any income from letting rooms, and what you can afford in terms of monthly income and outgoings."

Lenders will also impose a limit on the maximum loan to value (LTV) they will lend as a percentage of a house's value. This adds together any existing secured loans, including first mortgages to the amount you wish to borrow. If the total is greater than the LTV ratio allowed, then you may anyway be turned down. Maximum LTV's vary from 80 to 100 per cent ,according to the lender.

Depending on the LTV you may be asked to provide a surveyor's valuation. It costs around pounds 100, though some lenders include that in the arrangement fee.

You may be able to borrow more than the LTV if the improvements will increase the house value. A surveyor's written estimate would be required in advance.

`The Independent' is offering readers a free 27-page `Guide to Mortgages', with a mass of detail on how to find the right home loan and how to pay for it. The guide, sponsored by Barclays Mortgages. is available by calling 0800 585691. Or fill in the coupon on page 22