The amount aspiring homeowners and those taking the next step up the property ladder can borrow is increasing. However, it’s crucial those seeking credit assess their own ability to meet repayments.
In the past, a general way to calculate the maximum you could borrow was to times your annual salary by three. But reports suggest that some lenders are now offering borrowers access that’s double this. It’s a trend that reflects rising property prices as wages remain stagnant, making it more challenging to purchase a property.
If you’re offered more money than expected, it can be incredibly tempting to look at homes that are at the top of your price range. It could be a wise decision for you, for example, if it means you save money in the long run by not moving again. However, ensuring the repayments are affordable is vital.
While lenders do take steps to assess affordability, they don’t understand your full situation. It’s always a good idea, where possible, to have a financial buffer. The unexpected can happen and your financial situation can change. If your budget is already stretched it can place you under financial pressure.
If you take out a mortgage without assessing your ongoing ability to meet repayments, there can be serious consequences. Among the areas to consider are:
What would happen if you can’t meet your mortgage repayments?
Not meeting your mortgage responsibilities can mean losing your home and the deposit you’ve worked hard for in the worst-case scenario.
Property repossessions aren’t common and there are rules a lender must follow, often a homeowner will be at least several months in arrears before any action is taken. But if you’re unsure if you’ll consistently be able to meet mortgage repayments should you borrow the maximum amount, it’s something you should keep in the back of your mind.
Even missing or making a single late payment can affect your long-term financial situation. It will leave a mark on your credit report. This means you could be turned down for lending in the future or if your application is accepted that the interest rate isn’t as favourable.
Will you be able to meet repayments should interest rates rise?
At the moment, interest rates are at a low. It means that borrowers are facing lower repayments. However, the Bank of England has increased its base interest rate twice in the last two years and it’s speculated that further increases are on the horizon. It could affect your ability to repay.
When you’re approved for a mortgage this is something that your lender should take into consideration, but that doesn’t mean it’s something you shouldn’t think about too. Interest rate rises are likely to be gradual and over a medium timeframe. However, could you continue to pay your mortgage if they were to increase by 3% or 5%?
Choosing a Fixed Rate mortgage can give you peace of mind for a defined period of time if you’re worried about how rising interest rates may affect you.
Would you be living from month to month?
If taking out a larger mortgage means you’d be living from month to month, it may be wise to look at lower priced properties.
While home ownership is important and can be viewed as an investment, it shouldn’t come at the cost of other savings, such as your pension or an emergency fund. If all your finances will constantly be accounted for, it could mean struggling every month.
You also need to consider how it will affect your disposable income, would you be happy giving up hobbies and social activities to secure a more expensive home? Depending on your priorities, lower mortgage payments in return for more flexibility can be attractive.
Would you have the ability to cover financial shocks?
The unexpected can happen, and it could mean increased outgoings. If you took out the maximum mortgage available, would you be able to replace the boiler if needed, cover an unforeseen bill, or meet financial commitments during a period of unemployment?
Having some of your income unaccounted for can help you manage financial shocks effectively and provide you with greater security. Protection products may be able to provide you with some peace of mind here, although they will only provide cover in certain circumstances.
Securing peace of mind
Taking out a mortgage product is a big step, whether you’re a first-time buyer or moving to a new home. Taking the time to understand your income and expenditure can help give you peace of mind that you’re making the right decisions for you.
If you want to understand how differing mortgage repayments will affect your financial situation and security, please contact us.