Mortgage tips – How much can you really afford?

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There's so much media hoo-ha over the subject of mortgages these days. At the moment the media comment focused on Northern Rock's high profile difficulties shows no sign of abating. It's hardly surprising we're all so concerned given that the housing market is something that effects pretty much everyone, whilst first-time buyers or property developers, for example, may be more acutely aware of the movements of the property market we're all effected to some degree.

What often get neglected amidst all this media speculation are the basic issues associated with purchasing a home and there are few more fundamental issues, particularly for first time buyers, than the simple question of how much you can realistically afford to pay.

The unavoidable fact is buying a house is an expensive business, it's almost certainly amongst the most expensive things one will ever buy. Needless to say, the importance of getting it right is not something any of us should take too lightly, you should be willing to thoroughly asses how far your budget can realistically stretch. The first thing to consider is how much you earn: The majority of mortgage providers will be prepared to give you around three or four times your gross annual earnings. Those buying with a partner should expect lenders to increase the amount they are prepared to loan to you by your partner’s salary. So, say for instance you're on £30,000 you should probably be able to borrow £120,000, if you're partner is earning £20,000 you would be looking at £140,000. Alternatively you may be offered something like 3 times your salaries combined - in this case that would make £150,000, a slightly bigger loan.

It may also be possible to raise a slightly larger mortgage if you're assessed according to your financial history rather that just salary multiples. Such an assessment will take in to account your statements and outgoings to judge money management skills. Lenders with a good history thus stand a better chance of being given a more generous mortgage than might otherwise have been the case. Conversely, those with a less impressive credit record might be offered less.

It would be naive to imagine that having agreed on the sum you'll be borrowing and the size of your deposit (remember that the more you manage to put down as a deposit the lower you're interest rates are likely to be - it's therefore really worth getting together as big a deposit as you possibly can) this is the last of you're spending. You really need to account for the multiple further costs that will inevitably emerge before you can think about moving into your dream home.

Aside from the various niggling extra costs including valuation, survey and legal fees (at a rough estimate you should probably budget approximately £1,500 for these) the largest single additional cost will probably be stamp duty. This works on a sliding scale as follows: if the property value is under £125,000 then there will be no stamp duty fee, £125,001 and £250,000 will be a 1% fee, £250,001 and £500,000 will be 3% and over £500,001 will be 4%. Of course, for sellers there is also now the added extra cost of a Home Information Pack to factor in, you can probably expect to spend between £400 and £700 on a HIP.

You would be well advised to do a bit of financial self-assessment, don't assume that because a lender is willing to give you a huge mortgage you can actually afford to pay it. Try to be as realistic as possible and take into consideration your monthly income and outgoings. It's important to be honest with yourself and try not to commit to something that will significantly stretch your finances - a dream home is not worth bankrupting yourself over. Take a look at one of the many mortgage calculators out there, most lenders will have one on there website (You can find a Mortgage Calculator at A&L Mortgages or the BBC property site for example). In addition you can save money and time by checking out a Mortgage comparison site like the award winning fool.co.uk mortgages center or Moneysupermarket and keeping track of the most competitive deals.


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