Home Loans

home loan

Owning your own home has a fabulous and very grown-up sound to it. A place to call your own, settle down and grow old in, a privately owned house seems to offer that little bit of extra security not found in a rented home. Recently the entire global financial establishment was rocked to its foundations by a chain reaction of poor decisions made by mortgage company after mortgage company, which led to a rush of defaults on bank loans, which, in turn, led to a dramatic drop in house prices that left many in negative equity. All of the above caused something of a panic in the banking world which abruptly tightened lending criteria and increased interest rates. This had a similar effect on global finance as thrusting a spanner into the workings of a machine would have: a catastrophic grinding to a halt of usually smooth and untroubled processes!

Home equity is essentially the difference between what is owed on the loan and the value of the property. If a buyer saves £20 000.00 and borrows a home loan of £80 000.00 to buy a £100 000.00 home, he or she has positive equity in the home of £20 000.00. However, if the home owner borrows £95 000.00, only putting in a deposit of £5 000.00 and then the market falls, leaving him or her with a home only worth £80 000.00, there is negative equity of £15 000.00. Negative equity is essentially what the owner would need to repay the lender in the event of the house being sold for market value, and it is easy to see that this is a very undesirable state of affairs.

Once you have decided to take the first step on the property market you must work out how much you have saved towards a deposit and try to ascertain what size mortgage payment you can comfortably make each month. Most financial institutions will provide a mortgage calculator into which figures and dates can be fed to see the best option for you.

Do make sure that you take the time to go through the loan agreement very carefully, an error of just 0.5 percent per year can cost you a lot of money, especially when taken over twenty or thirty years. Mortgages are usually very long term loans; the name itself means 'death contract' and originally they would run until the death or settlement of the obligation. Understand the rates that you will be charged and ask questions about the various types of mortgage products that are available.

In summary:
  • Home loans are also known as mortgages, and they can last for as little as five years or as long as fifty – although the latter usually have milestones or balloon payments at various points in time. These mortgages require refinance periodically, which is when the bank and the borrower rework the terms of the agreement
  • Banks are relaxing their criteria once again, and the property market is recovering, which means that now is a good time to buy as long as you are prepared to be a home-owner
  • Home ownership and the property market affect the global economy to an extent not properly understood until the recent crisis, which was triggered by a series of bad loans which quickly went into default.