Can you afford a mortgage?
A mortgage is a massive financial undertaking, and there are several factors that decide how much you can borrow
For millions of people around the world, renting a room or a property is incredibly annoying. Instead of throwing away money by giving it to a landlord, they would rather invest in their own future and pay towards a property they’ll eventually own outright one day.
Mortgages are a way to make this happen — and by saving up a proportion of the total house’s cost, known as a deposit, you can borrow the rest and pay it back in monthly instalments. However, it’s worth bearing in mind that this is a massive financial undertaking, and there are several factors that decide how much you can borrow.
Can you afford a mortgage?
A good method of how to calculate mortgage amounts lies in salary multiples. This can vary from country to country, but in the United States, it’s generally accepted you will be eligible to borrow up to two-and-a-half times your annual gross income. Let’s imagine Emma earns $50,000 a year. Generally, this means she could take out a loan of up to $125,000 to put towards a house. Research from Zillow suggests that the average house in the US is worth $229,600, meaning she would about $105,000 short of getting a place on her own. Over in the UK, the allowance is far more generous — four-and-a-half times gross income — so be sure to check out what’s happening wherever you live.
When it comes to mortgage tips, remember that it’s likely you will have to make some form of financial contribution towards your new home, and this means saving up for a deposit. Following on from the 2008 financial crisis, which was caused in part by banks lending to people who could not afford to pay their mortgages, deals where consumers could borrow 100% of a property’s value have practically vanished.
A measurement known as loan-to-value (LTV) ratio is used to calculate how much money is being borrowed in percentage terms in relation to the value of the house. This is really easy to calculate. If the LTV stands at 90% — meaning the loan represents all but 10% of what the property is worth — the borrower will need to contribute the rest. So, if Tracy is buying a $300,000 house and has a mortgage with 90% LTV, she will need to contribute $30,000 of her own money.
The lower the LTV, the more competitive the interest rates that the borrower will be able to access. Generally speaking, anything above 80% LTV is regarded as high, meaning borrowers who have saved less than 20% towards the cost of a house will normally end up paying higher levels of interest.
How much is a mortgage payment?
This is difficult to explain without knowing what a property is worth — but the due diligence you undertake with your lender is designed to ensure this is affordable. There are also countless calculators online which you can use to receive an estimate of what your monthly outgoings would be. To figure out how much mortgage you could afford, you should also factor in bills — property tax, electricity, gas, water, internet access — and other essential outgoings such as credit card payments, groceries and childcare. Given how interest rates are so low at the moment, it’s also worth double-checking to see whether any mortgage you’re about to take out will still be affordable if the cost of borrowing rises. Unless you’re on a fixed-rate mortgage, where levels of interest are frozen for a pre-determined period of time, your costs will rise in line with what central banks decide, so it’s always worth having breathing space.
Mortgage tips to remember
As well as saving as much as you can towards a deposit, and shopping around for mortgages with low interest rates, here are some other mortgage tips to remember:
Make sure your credit score is healthy. Lenders want to ensure that they are only borrowing money to those who have a strong track record of paying bills on time. As such, it’s worth making sure that you have a reputable credit rating — and checking it’s free of inaccuracies — before you make applications.
Pay down your debts. Part of the lender’s checks will involve assessing how much credit you currently have access to, and how much you’re using. If you have debts on a card, it’s worth settling these full, as otherwise mortgage providers will be concerned that your monthly repayments are too high.
Seek advice. The world of mortgages is a big, daunting and complex place. Hiring an adviser who works in your interest — and can find deals that suit you.
Look for schemes. Some countries where property prices are high have initiatives in place which are designed to make homes more affordable for first-time buyers. However, there can be strict rules surrounding eligibility — and you may not own the entire property.
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