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With 133,000 homes repossessed during the height of recession in 2008, we should all remember to be careful not to live above our means. The consequences of not being able to pay back your mortgage can mean repossessed homes. According to England.Shelter, only last year there were still 158,000 households, who were struggling to keep up with monthly repayments. Interest rates have been at 0.5% for 2 yearsand so an increase in inevitable. Therefore it is so important to be realistic in working out what you can afford, factoring in scenarios such as interest rate increases and losing your job.
At the same time, it might be the case that you can afford more than you thought. Again, do your research and work out what is the right house price for you. My partner and I initally had a much lower house price in mind, and spent weeks looking at houses that weren't quite right. When we did further research on how much more we could afford, we realised we were looking at the completely wrong price bracket.
You hear numbers bandied around like: you need XX% deposit, you have to earn over X amount of money, interest rates are around X.XX%. DO NOT ASSUME these are set numbers, the fact is, these numbers are all VARIABLES. How much deposit you have will affect the rate of interest on your repayments which will require to you to earn X amount of money per month to cover the cost of living and your mortgage repayments.
The general rule is the larger your deposit, (the lump sum you can pay towards your house up front), the lower the interest rates you can get on your mortgage (lower repayments every month).
The rates of interest offered are based on LTV. This stands for Loan to Value. This is usually shown as a percentage figure. So if you want to buy a £300k property and you have £60k cash you can put down as a deposit, this means you will need a loan of £240k. The % LTV is therefore: 240/300 = 80%
Based on your LTV, you can then look up what your interest rates will look like. Use comparison websites like MoneySupermarket.com to find out what what interest rates you will likely be paying.
Once you know this, use a mortgage repayment calculator to work our how much your monthly repayments would look like. HSBC has a pretty simple one . Simply input:
1.) the value of a house price you think you can afford
2.) the deposit you have saved.
3.) The interest rate you have looked up on MoneySupermarket.com
4.) number of years you want to pay your mortgage back over
Press enter and then you will get the monthly repayment amount. Ask yourself, would you be able to afford that each month? If not, play around with each of the variables. e.g. you may have to look at cheaper houses, you might have to save for a bigger deposit to reduce the interest rate you pay, or you might have to choose to take longer to pay back your mortgage.
You should also increase the interest rates to see how much your monthly repayments would look like, should interest rates increase. You can choose to fix the rate of interest over terms such as 2/5/10 years by choosing a fixed rate mortgage, however to get this added security it is likely these rates will be higher than if you chose a variable rate mortgage.
You will also need to do some proper budgeting, write down a list of your monthly expenditure and deduct this from your net income. You will need to prove this when you try to apply for a mortgage so be realistic and check to your bank accounts to see if what you think you are saving/spending is actually happening!
Don't forget to check out part 2 of this series: Trial and Error (Offers & Rejections)