How much can you afford?
Before you start looking for a new home it is imperative that you calculate how much you can afford to spend. This covers not only the purchase price but the cost of stamp duty, agents fees, solicitors and ongoing such as valuation surveys, taxes and community area upkeep.
The basic principles
When buying a home, most people naturally want to buy as much property as they can afford, given their income and deposit. Adversely, overstretching the budget will leave you short to do any work to the house or to pay the monthly bills (let alone holidays). Sadly, thousands of people end up falling behind with their mortgages, and risk having their homes repossessed.
How much you can afford will depend on:
- How much you expect moving and building costs to be.
- What your standard of living and monthly outgoings are.
- How confident you are regarding job security – and will you get pay rises?.
- What your expectations are in terms of house prices and mortgage rates – are they going up or down?.
- Whether you are happy being “house poor” with a big house but little disposable cash.
- What safety net you have in terms of savings or family support.
- What your appetite for risk is.
What is my overall budget?
Firstly you will need to work out your total budget and how much you have at your disposal to pay for everything. Ultimately this is the capital you have at your disposal and how much you can borrow against the property as a mortgage.
The capital you have depends on:
- What savings you have. If you are saving to buy, you may want to consider a Help to Buy ISA
- What support you get from your family (perhaps by them extending their mortgages). What capital you can raise from selling an existing home, or extending a mortgage on a property you are not selling
- Any government support.
- What unsecured funds can you raise, for example, credit cards. It is strongly recommended that this route is not used as debts can quickly spiral.
From this total capital, you need to deduct any costs of buying, moving and building, as well as the savings safety-net you want to keep (you will need to have some savings after you move, in case of emergencies). This leaves you with the deposit that you feel you can afford to put down towards the cost of your home.
How much can I borrow?
The size of your mortgage will depend on:
- The size of your deposit. There is an increasing number of high loan to value mortgage products coming to the market some as high as 95%. In an ideal world the deposit should be at least 10% of the value of the property.
- How much outstanding debt you currently have e.g. bank loans, store cards, credit cards, finance.
- Your current total income. Many banks lend up to five times salary although these are maximum figures. Lenders all have different borrowing criteria regarding joint incomes & bonuses and it is worth investigating the best deals for your circumstances.
- Your current working status. Most lenders will accept higher loan to value mortgages if you are in a stable job position as opposed to being self employed or freelance for example.
What are the options if you are refused a mortgage?
There is much debate regarding lenders and how they are criticised for lending too much and endangering homeowners of repossession or refusing to loan a value against a property.
What must be remembered is that lenders are businesses and as such they all have different ways of interpreting buyers circumstances. If you find that you have been refused by multiple lenders it is probably the case that you are overstretching your mortgage request and it will need to be readdressed.
How much will my new home cost?
To work out how much you can afford you will have to work out:
- The total purchase cost including stamp duty, conveyancing, surveying & mortgage fees.
- You may also have Estate Agent selling fees for your existing home.
- Moving costs including new furniture, white goods and soft furnishings.
- Any immediate repair works or decorating costs.
Will I be able to afford to pay my mortgage and other household bills?
Now that you have calculated what mortgage you will need you must incorporate what it will physically cost to maintain and run the property. As a general rule it is recommended not to spend in excess of 35% of your salary on mortgage payments.
- Ask the vendor what the current bills are for the property such as council tax, water, power & insurance. This usually surprises people who often under estimate costs by a considerable margin.
- Calculate the rise in mortgage payments should the rate of borrowing increase. You can reduce this risk by opting for fixed rate deals however at some point an increase may be inevitable.
- Do you have insurance protection that covers you in the event that you are unable to work or are made redundant. It may also be sensible to think about when you may start a family and what impact this will have on household finances.