Buying A House // Working Out What You Can Afford

Buying a house is a big commitment and something that you should consider carefully. Although most people dream of owning their own house and getting on the property ladder, not everyone can afford it. The last thing you want is to commit to a mortgage only to not be able to afford the things you enjoy in life, like going on holidays abroad or getting a new car.

If you are looking into buying a property it’s important to think hard about what you can and can’t afford, after all, it is a long-term financial commitment you will be making so you do need to be in a good position financially.

How much can you borrow?

When a mortgage company is working out how much you will be able to borrow, they consider things such as your annual income, your deposit, debt levels, your regular expenditure, and your credit rating. Ensure you have worked out how much money you spend on thighs throughout the year so you have an estimate of how much you can afford.
If you are applying for a joint mortgage, your partner’s finances will also be considered. To work out how much you can borrow approximately, use a home loans calculator which will give you an idea of how much you can afford. Different lenders will have their own ways of how they calculate things and the loan amounts will differ.

You will need to go into a lot of detail about your income and spending habits but this is for your benefit, as the lender will be able to help you find the best product for your circumstances.

How much deposit will you need?

Get a rough idea of how much local house prices are in the area you are looking to move to. You can do this by looking online at local estate agents or property portals. The figures on these sites are asking prices and maybe slightly higher than what the property is worth, but you will have an idea of how much you are looking to pay for a deposit.
Some lenders will accept a 5 percent minimum deposit but usually, you have to put 10 percent of the value of the property. There are some mortgages where you may even be required to put a larger deposit down, which can affect how much you can borrow. Due to the economic issues that have been caused by COVID-19, a lot of lenders have stopped their low-deposit deals, so this is something you need to consider when looking to buy a property.

If you can’t afford the deposit right now, it may be best to keep saving away to make your deposit bigger. This will work in your favour because the more you can save up, the better mortgage deals you will have to choose from. When you have a larger deposit, you will have better options with lower interest rates.

Here are some reasons why it’s better to have a bigger deposit:

  • You will get better mortgage deals. Mortgage lenders will see you as less risky if you have a bigger deposit, and will usually offer you lower interest rates.
  • Your monthly repayments will be cheaper. A bigger deposit means you will have a smaller loan, and therefore your monthly repayments will be cheaper.
  • Your chances of being approved are higher. If your deposit is smaller, there’s a chance you may fail the affordability checks that lenders carry out to determine if you can afford the mortgage repayments, as you will be spending more on your mortgage each month.

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Can you cover the monthly mortgage payments and other household bills?

When you have considered the type of mortgage you may be able to afford, you should also work out how much your other monthly expenses are going to be. How much deposit you put down depends on the interest rate you will pay, which is why it’s better to put down a larger deposit. It is recommended that no more than 35 percent of post-tax income should go on your mortgage payment.

Look at the rent you are currently paying, if you are struggling to pay that and your mortgage will be higher, you should reconsider. You also need to think about other household bills, such as council tax, water, and insurance. These bills all add up and can be expensive so you need to think about if you can afford this too.

Scenarios play out where your financial situation may change for the worse, so you must consider this. For example, if you lose your job or experience a shortage of income because of maternity leave, it can affect how you will pay your mortgage and other household bills.

There is also the chance that your interest rate could go up by just one or two percent and this could change your repayments. It’s recommended that you stress test the mortgage to cover all scenarios so you have an idea beforehand, and if you are unable to afford an increase in interest rates, you should get a fixed-rate mortgage instead. This will likely increase your monthly mortgage costs but will be beneficial for you in the long run.

What other costs do you need to consider?

Buying a property isn’t just about putting down a deposit and making sure you can afford to pay the mortgage repayments, there are other costs you need to think about. One of the bigger additional costs is stamp duty. This is a tax that you may have to pay if you are buying a residential property in England or Northern Ireland. However, until 31st March 2021, you may pay a reduced rate, or if your home is under £500,000 you won’t pay stamp duty.

Other fees you should consider are estate agent fees if you are selling at the same time, surveys and valuations fees, and conveyancing/solicitor fees. You also need to account for removal costs, buying furniture, and any home renovations you want to carry out.

*Collaborative post*

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