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Mortgage Affordability

With the threat of repossessions on the rise and an estimated 30,000 properties in 2007 and 45,000 in 2008 it becomes ever more important that careful planning is carried out before undertaking the financial commitment of a mortgage. To assist with the planning stage the following document will outline some of the major factors that need to be taken into consideration.

The Mortgage Approval Process
It is fairly obvious that your income is the biggest factor into how much you can afford to pay on a monthly basis for your mortgage. There are two ways to calculate this, the first is the income multiplier and the second is affordability. The income multiplier is a fairly rough guideline as too how much a lender may consider giving you based on your income. Usually the calculations will be around 3 times a single income or 2.5 times a joint income, this can vary and some lenders will use a credit rating to give you a higher percentage. It may be you would do anything to have that property you always dreamed of but over stretching could cause serious financial problems for you in the future. The other method is by using an affordability calculator; these take a significant number of issues into consideration and may give you a more accurate figure. There are many more lenders that are now using this method to calculate how much you might be able to afford on your repayments. Generally when calculating your income the lenders will take your guaranteed monthly gross Income, bonuses that are guaranteed, other income such as overtime that is not guaranteed will often not be taken into consideration.

Some of the further aspects that the lenders will take into account are your monthly outgoings you are committed too already, these will include any loan repayments, credit cards or store cards. If you are remortgaging then a lender may give you the option to bundle these into the remortgage and increase your monthly payment. The mortgage rates will be significantly lower than any of the high interest credit options or indeed a personal loan. It is fairly common that lenders will require a deposit upfront as part of the mortgage agreement, usually for a residential property this will be around 5% of the sale price, so for example if you buy a property for £100,000 then they will require £5000 deposit. The mortgage calculation will be made on the property price minus the deposit. Buy to let property will require a higher deposit and this can be in the region of 25%, this needs to be taken into consideration if you are buying a property to rent out. Before you even consider a mortgage you will need to be able to provide a deposit or some new build property will give you the deposit as part of the purchase agreement.

Fixed Rate Mortgage
Your personal income is the part of the mortgage process that is transparent to you; there are other fees and charges that may not be so visible. Many mortgage providers will have fees and charges when you first set up the contracts, these can range in cost and what you pay. A good example is with the mortgage interest rates, if you take out your mortgage over a shorter period of time the rates will be reduced compared to a longer time period. For example if the borrower required £100,000 over a 25 year period then the interest rate may be 8%, if the same borrower wanted £100,000 over 15 years then the interest rate may be 6.75%. During the times of uncertainty many people now consider fixed rate mortgage. A fixed rate mortgage remains constant over the duration that the borrow takes out the mortgage, these can vary from lender to lender, some are 2, 5 or even 10 years. This provides people with many advantages often first time buyers will opt for a fixed rate, some of the benefits include the ability to plan ahead knowing that their mortgage interest rates will not increase even if the Bank of England increase the base rate of interest. Some of the best mortgage rates can be found with a fixed rate deal, this is especially true if you take out a longer term one due to this committing you in with the same supplier.

House Prices and Interest Rates
The house prices will have a significant determination on what you can afford with regards the type of property and in a mortgage. In the current market many first time buyers are finding it particularly hard to get their first step onto the property ladder. The problem associated with this are the prices are so high in the current market that for anyone needing a mortgage they will be requiring significantly more than 3 or 2.5 times their income. Property prices have been rising faster than inflation which in turn will mean the affordability has been greatly reduced. But not only are the property prices affecting the affordability but due to economic pressures the interest rates have been increasing over the last year. Anyone locked into a fixed rate mortgage will not have a problem; however variable rate mortgages or people trying to obtain a new mortgage can be affected. The mortgage rates are critical to the number of mortgages that are provided and how much risk a lender is willing to take on providing new ones and who can afford them. To help people calculate how much they can afford many of the lenders provide mortgage calculators to help with the budgeting. It is possible to find online calculators that will break down to the type of mortgage that you may require such as a mortgage rate calculator, first time buyer calculator or a buy to let calculator. The mortgage calculator will allow you to determine the amount you want to borrow, the interest and the term and will provide a monthly repayment figure. You can compare different types of mortgages and what will happen to the payments if you make an over payment. Some will allow you to add in your monthly outgoings, income, savings and expenditure to give you a more accurate figure as to whether you will be accepted for a mortgage from that lender.

 
 
     
 

 

 
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