Maximise Your Mortgage Potential

Whether it be this summer or next, when it comes to getting a mortgage, the word `affordability' is one you're likely to hear quite a lot.

This article was first sent to Fools as part of our 'Summer Lolly' email series.

Lenders, however, interpret this term in various ways, and will often make different decisions about how much you can afford to borrow. Different criteria among lenders can lead to big differences between the amounts they will offer you.

But as well as how much you earn, lenders also look at your existing debts.

Calculated circumstances...

If you'd like to figure out how your existing debt could affect the amount you can borrow on a mortgage, take a look at our brand new mortgage calculator.  Let's test it using some of our own statistics.

According to The Motley Fool Mortgage Service, the typical incomes of first-time buyers making a joint purchase though our service were £28,610 and £20,264 respectively.

Using these figures, if you were one of two `average' joint purchasers applying for a mortgage with no debts, you could typically borrow between £144,000 and £204,000, providing you had at least a 10% deposit.

However, if you had combined monthly commitments (such as payments towards a loan or credit card) of £500, that figure would be reduced to a range of between £126,000 to £178,500. So at the top end your maximum loan amount has fallen by £25,500.

Even a relatively small £200 monthly commitment would cut your top borrowing amount to £193,800, a difference of £10,200. Ok, £10k may not sound much - but for a first time buyer it can mean the difference between getting on the ladder and staying firmly on the ground.

Of course, this is just one example. To see how your own borrowing habits could affect your chances of getting your dream home, have a go at putting your own figures in our calculator.

Paying off debts takes time, and will mean delays for you getting on the ladder. However, even small amounts of existing debt can mean a lender will lend you thousands of pounds less than they would if you had no debts. And anyway, with house prices falling, waiting to buy a home might not be such a bad idea.

Wiping the debt slate clean

If you are thinking of clearing your debts first, one of the cheapest and easiest ways you can do so is by using a 0% balance transfer credit card, which, for a fee of around 3% will eliminate the hefty interest payments you'd otherwise pay.

The best on the market for balance transfers is Capital One's Platinum BT and Purchase credit card, which offers 0% on balance transfers until December 2009. Just be careful not to spend on the card, as if you do, you will fall into the negative payment hierarchy trap.

If it's an overdraft you're trying to clear, or you need a cash sum to pay off a loan, you could opt for a credit card that allows you to take part of your credit limit as a cash transfer. The Virgin Money Credit Card MasterCard is one of these, and for a 3% fee, it will let you transfer money as cash into your bank account, with no interest to pay for a whole 15 months.

If you are already in a position to buy, then I guess there is nothing to stop you. Just bear in mind how existing debts affect how much money a lender is prepared to offer you for a mortgage.

Wait, and pay off your debts and that dream home could not only be yours, but be more affordable too. Even if you don't eventually buy, at least you will be debt free.

Either way, it's a win-win situation!

Compare credit cards and mortgages with The Fool!