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Mortgages – How to Know how Much you can Afford

Tue 22 Apr 2014

Mortgages, for the majority of us hoping to buy a home, are a necessary part of the process. The main reason being few of us tend to have hundreds of thousands of pounds in our wallets and so a loan of this form is a necessity.

One of the things that people tend to struggle with when looking for a mortgage is understanding just how much they can actually afford. Even though the bank may offer you quite a high upper limit, it can often be hard to know how much is too much – after all, we all want our dream home and they tend to cost more money. However, the perils of over-borrowing can be devastating and cause all sorts of problems in the immediate and the long term.

So, let’s take a look at some tips to ensure that you don’t over-borrow and end up suffering the consequences. Here are some tips to help you stay within your means.

Interest Rates

At the moment, interest rates in the UK and around the world are at historically low rates – this of course means that it’s very cheap to borrow money, mortgages included. This is partially down to the hope that lower loans encourage economic growth – which to some degree it looks like it does.

However, it is thought that when the economy improves, interest rates will also increase. This will simply mean that the monthly cost of a mortgage is going to increase. So, in short it means that you should be sure that you will be able to pay your mortgage should the interest rates increase, otherwise there could be issues.

The easiest way to figure out whether an increase would be viable is to calculate your mortgage at a range of higher rates. You could also look into a fixed rate mortgage so you don’t need to worry about changing interest rates.

Personal Factors

When looking for a mortgage, it’s best to examine your personal factors as much as you can. Take into account the worst case scenario to prevent problems with your loan and you’ll be ready for any such problem should it occur.

From job security issues, to pay, and of course ill health – think about the appropriate cover for all of these, as it’s best to make sure that you have all angles covered to prevent problems after you get your loan.

Banks

Be aware that some banks are more inclined to offer people larger amounts than others – sometimes up to five times their salary. However, history has shown that small lenders who are willing to offer larger rates can end up in financial difficulty.

This can often mean that afterwards they increase their interest rates significantly and this means people end up having to pay large amounts back, often far higher than would be the case with more established banks who offer lower LTVs – Bank of Ireland being a case in point of this issue.

Although mortgage applications are now being scrutinized more than ever, when it comes to buying a house and taking out a loan, the responsibility is up to you. Always take the above points into consideration before you get your mortgage and things should work out just fine. 

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