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Mortgages – How much can you afford?
There’s so much media hoo-ha over the subject of mortgages
these days. As I write this the Northern Rock debacle is generating more news
headlines than almost any other story and shows no sign of abating. I suppose
the reason for our ongoing obsession with housing booms and busts is that we all
have a staked interest, whether we’re already homeowners or are contemplating
our first tentative step onto the property ladder the state of the housing
market is something that affects us all.
What often get neglected amidst all this media speculation are the basic
issues associated with buying a house and there are few more fundamental issues,
particularly for first time buyers, than the simple question of how much you can
realistically afford to pay: How big a mortgage can you reasonably stretch to?
The simple fact is buying a house is an expensive business, probably one of
the most expensive things any of us are likely to do. It is thus not something
anyone should take lightly, be prepared to invest plenty of time and precaution
into establishing exactly how much you can afford to pay. The first thing
to consider is how much you earn: lenders will generally be prepared to loan you
between three and four times your annual gross salary. If you’re buying with a
partner then lenders will probably add their salary on top of what they are
willing to lend you. So, if you’re on £30,000 you should probably be able to
borrow £120,000, if you’re partner is earning £20,000 you could be looking
at £140,000. An alternative deal might simply be a calculation of three times
your combined salary – in this case that would make £150,000, a slightly
bigger mortgage.
It may also be possible to raise a slightly bigger mortgage if you’re
assessed according to your financial history rather that just salary multiples.
This would involve a lender looking at your statements and outgoings and using
this as the basis of their calculations. Therefore, if you are deemed to have
managed your money effectively in the past your lender may be prepared to grant
you a bigger mortgage than they otherwise would have. Conversely, those with a
poor credit history may be offered less.
Don’t simply assume that once you’ve established how much you’re going
to borrow and how much you can afford to pay on the deposit (remember that the
more you manage to put down as a deposit the lower you’re interest rates are
likely to be – so it’s worth scraping together whatever savings you can
muster plus, if possible, a parental contribution) this is the last of you’re
spending. You really need to account for the multiple other costs that are bound
to emerge before you can contemplate moving into your dream home.
Aside from the various niggling extra costs such as valuation, survey and
legal fees (at a rough estimate you should probably budget around £1,500 for
these) the largest single extra expense is likely to be stamp duty. This works
on a sliding scale as follows: if the property value is under £125,000 then
there will be no stamp duty fee, £125,001 and £250,000 will be a 1% fee, £250,001
and £500,000 will be 3% and over £500,001 will be 4%. Of course, for sellers
there is also now the added extra cost of a Home Information Pack to factor in,
you can probably expect to spend between £400 and £700 on a HIP.
It’s also prudent to assess your finances for yourself, don’t assume that
because a lender is prepared to offer you a large mortgage you can actually
afford to pay it. Look at your monthly income and expenditure and consider
realistically what you can afford. It’s important to be honest with yourself
and not commit yourself to something that will seriously stretch your finances -
a dream home is not worth bankrupting yourself over. Take a look at
Alliance and Leicester’s mortgage
calculator , or any of the big lenders, who will have one on their website.
It might also be useful to check out the Remortgage Market website, for
further guidance.
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