By: James Miller
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.
Mortgage multiples
Because of the recent rise in the price of property, the average buyer borrows 2.8 times their income. The traditional lending limit is normally three times first income and so falls within the acceptable limit. In some cases however, even four or five times income are quite acceptable.
Overall, 3.25 to 3.5 times income are what most lenders offer to single borrowers or up to 2 for joint income or 3.25 to 3.5 times one income plus the other income. Bank of Ireland Mortgages extend to four times first income with a first time buyer ‘First Start’ product which lends up to four times a parent’s income (minus their own mortgage commitments) on top of the applicant’s own income.
Other lenders would approve four times income if accompanied with a large deposit. Enhanced income multiples are available to selected borrowers and professions e.g., accountants, solicitors, dentists, etc., etc., earning over £20,000 per year. Teachers are just one profession to which the Scottish Widows Bank may offer four times first income. The opportunities are many and diverse and any would-be borrower is advised to scan the market thoroughly before deciding which one is for them.
Credit Rating may also be used to assess an applicant’s suitability. This could be any of several factors – income, outgoings, employment history, credit history, etc., etc.
Consumer debt in the U.K. has been a cause for concern of late and if interest rates continue to rise the problem will be of even greater concern. Over the pst 20 years, the average homeowner paid an average of 21% of his post-tax income on mortgage repayments. Currently, that figure is 13.6%. Philip Robinson of the Financial Services Authority is quoted as saying: ‘ There is a strong argument for stress-testing all new borrowers against a higher rate which may occur during the first few years of a mortgage. After all, a 2% increase in the current level of base rates could translate into a near 50% instalment increase for a number of variable rate, interest-only mortgage borrowers. For people who have already borrowed up to the limit, this could be financial disaster.’
Questions you must ask yourself :
1.Do you have income protection or critical illness cover?
2.If household bills, such as gas, electricity, water or council tax rise, could you still afford your mortgage?
3.If you were made redundant at work, could you still cope with repayments?
4.Could you adapt your budget to a 2% rise in interest rates, either over the course of a year or in one jump at the end of the term of a fixed rate or discounted deal?
