How Much Mortgage Can I Afford?
Taking stock of your finances and deciding what amount of monthly repayment you're able to take on will help guide your mortgage and home search.
One of the big questions any would-be home buyer has is just what size mortgage they will be able to get. After all, this will dictate what sort of property they are able to buy.
But just as mortgage lenders will want to test your finances to get an idea of what you can afford, you too should go over your money situation to establish just what sort of monthly repayment you can handle.
So how do you work out what mortgage you can really afford?
What can I afford to pay?
The first step any borrower needs to follow is to look closely at their last few months of bank statements.
It’s important to get a clear idea of what is coming in, and where that money is going. By doing this you can build a picture of what expenses are essential, and which can be dropped if need be in order to secure your dream property.
For example, you might have a weekly takeaway that could drop down to once a fortnight or even once a month.
From here, you can get a good idea of what you can genuinely afford to pay each month and therefore how much you are comfortable spending on the property.
Just because two borrowers may earn the same amount, it doesn’t mean they can afford the same size mortgage ‒ one may have more substantial financial commitments they have to meet each month than the other, such as childcare or other debt repayments.
What affects how affordable the mortgage is?
All sorts of different elements of your mortgage deal will affect just how affordable it is for you. The first is of course the interest rate ‒ the higher the interest rate, the larger the repayments are going to be.
You will also need to check what fees are included with the mortgage. Many mortgages require the payment of a product or arrangement fee, just for securing that specific rate, and it can cost about £1,000, sometimes more. You can pay this upfront, or add it to your mortgage balance, but remember that if you opt for that latter option you will end up being charged interest on it so it will cost more in the long run.
Then there is the mortgage term. This is the period over which you will repay the loan, with longer terms resulting in smaller ‒ and perhaps more affordable ‒ monthly repayments. For example, if you took out a £100,000 mortgage with a 3% interest rate. Over a 25-year term this would mean monthly repayments of £474, while over a 30-year term those repayments would fall to £422.
However, as it takes longer to pay the loan off, it will cost more overall. That 30-year term means you’ll pay a total of £151,777 rather than £142,263.
Is there a difference between what I can borrow and what I can afford?
Yes there is. A mortgage lender will give you an idea of how much you can borrow, based on your financial position.
But it may be that the actual monthly repayments are at a level beyond what you feel comfortable with, even if you can technically afford them each month.
This may be because the size of the monthly repayment leaves you with little left over each month to cover any unexpected costs which may arise, such as getting car repairs or paying for a new boiler.
Some borrowers will also be more willing to make cutbacks in their lifestyle to get on to the property ladder than others, so think too about how many changes you would be willing to make.
You also need to bear in mind that circumstances change. If you took out a variable rate mortgage, and the rate was increased, would you be able to cover the higher monthly repayments? Similarly, what if you had a child, or you had to take a lower-paying job?
It’s important to give yourself some financial wiggle room so that you are comfortable making those repayments in the future, no matter how your life or mortgage rate may change.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more