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Mortgage: The danger of over stretching your finance
Borrowing more and more money for a mortgage is getting easier, with some mortgage providers offering mortgages up to four times your salary.
However, while on paper it may look like you can afford a mortgage based on a high income multiple such as above, you could run the risk of over stretching your finances and getting seriously – very seriously - in to debt.
Nothing in life in certain and with the days of a job for life well and truly over and unemployment on the rise, some time down the line you may find yourself in financial difficulty and not able to meet your monthly mortgage repayments.
Also, while you may be able to afford your monthly mortgage repayments now, rises in the Bank of England base rate could mean that your mortgage repayments become unaffordable in the near future.
So what can you do to take steps to ensure that you can pay your mortgage and remain financially comfortable?
First of all, draw up a budget of your outgoings and incomings. Include everything from car insurance to petrol; food to clothes; entertainment to the cost of haircuts etc.
Then build in costs associated to being a home owner – home insurance, council tax, utilities etc. And don’t forget to include to allow for putting away money in to savings!
Take the amount of money you have left over – and around two-thirds of that money is what you can comfortably afford to pay out for monthly on a mortgage.
Once you have that figure, you can work back to see how much you can realistically afford to take a mortgage loan out for. It may only work out to be two and half times your gross salary as opposed to the lovely four that you have been offered, but at least you know that you’ll be able to afford the repayments pus have a little money put by for emergencies, or mortgage rate increases.
Try and get three months’ salary behind you in savings, so that should you become unemployed, you can ‘afford’ to be out of work for a while.
Finally, consider taking out an MPPI policy – Mortgage Payment Protection Insurance policy. There are some inexpensive, high quality ones available and will help you out financially should you be unable to work due to unemployment, illness or disability for up to a year.
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