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Mortgage:The Danger Of Over
Stretching Your Finance By James Miller
Borrowing more and more
money for a mortgage is getting easier, with some
mortgage providers offering mortgages up to four
times your salary
However, while on paper it may look like you can afford a
mortgage based on a high income multiple such as
above, you could run the risk of over stretching your
finances and getting seriously very seriously in to debt.
Nothing in life in certain and with the days of a job for
life well and truly over and unemployment on the rise,
some time down the line you may find yourself in financial
difficulty and not able to meet your monthly mortgage
repayments.
Also, while you may be able to afford your monthly
mortgage repayments now, rises in the Bank of England
base rate could mean that your mortgage repayments become
unaffordable in the near future.
So what can you do to take steps to ensure that you can
pay your mortgage and remain financially
comfortable?
First of all, draw up a budget of your outgoings and
incomings. Include everything from car insurance to
petrol; food to clothes; entertainment to the cost of
haircuts etc.
Then build in costs associated to being a home owner �
home insurance, council tax, utilities etc. And don�t
forget to include to allow for putting away money in to
savings!
Take the amount of money you have left over � and around
two-thirds of that money is what you can comfortably
afford to pay out for monthly on a mortgage.
Once you have that figure, you can work back to see how
much you can realistically afford to take a mortgage
loan out for. It may only work out to be two and half
times your gross salary as opposed to the lovely four that
you have been offered, but at least you know that you�ll
be able to afford the repayments pus have a little money
put by for emergencies, or mortgage rate increases.
Try and get three months� salary behind you in savings, so
that should you become unemployed, you can �afford� to be
out of work for a while.
Finally, consider taking out an MPPI policy � Mortgage
Payment Protection Insurance policy. There are some
inexpensive, high quality ones available and will help you
out financially should you be unable to work due to
unemployment, illness or disability for up to a year.
Mortgage multiples
Because of the recent rise in the price of property, the
average buyer borrows 2.8 times their income. The
traditional lending limit is normally three times first
income and so falls within the acceptable limit. In some
cases however, even four or five times income are quite
acceptable.
Overall, 3.25 to 3.5 times income are what most lenders
offer to single borrowers or up to 2 for joint income or
3.25 to 3.5 times one income plus the other income. Bank
of Ireland Mortgages extend to four times first
income with a first time buyer �First Start� product which
lends up to four times a parent�s income (minus their own
mortgage commitments) on top of the applicant�s own
income.
Other lenders would
approve four times income if accompanied with a large
deposit. Enhanced income multiples are available to
selected borrowers and professions e.g., accountants,
solicitors, dentists, etc., etc., earning over �20,000 per
year. Teachers are just one profession to which the
Scottish Widows Bank may offer four times first income.
The opportunities are many and diverse and any would-be
borrower is advised to scan the market thoroughly before
deciding which one is for them.
Credit Rating may also be used to assess an applicant�s
suitability. This could be any of several factors �
income, outgoings, employment history, credit history,
etc., etc.
Consumer debt in the U.K. has been a cause for concern of
late and if interest rates continue to rise the problem
will be of even greater concern. Over the pst 20 years,
the average homeowner paid an average of 21% of his
post-tax income on mortgage repayments. Currently,
that figure is 13.6%. Philip Robinson of the Financial
Services Authority is quoted as saying: � There is a
strong argument for stress-testing all new borrowers
against a higher rate which may occur during the first few
years of a mortgage. After all, a 2% increase in the
current level of base rates could translate into a near
50% instalment increase for a number of variable rate,
interest-only mortgage borrowers. For people who
have already borrowed up to the limit, this could be
financial disaster.�
Questions you must ask yourself :
1.Do you have income protection or critical illness
cover?
2.If household bills, such as gas, electricity,
water or council tax rise, could you still afford your
mortgage?
3.If you were made redundant at work, could you
still cope with repayments?
4.Could you adapt your budget to a 2% rise in
interest rates, either over the course of a year or in one
jump at the end of the term of a fixed rate or discounted
deal?
Article Source:
http://www.articlemap.com
James Miller is a freelance writer specialised in consumer
credit, covering topics such as how to deal with bad
credit, mortgages and insurance. He aims to help
people navigate the financial industry.More information :
www.building-society.org
www.remortgage-bad-credit.co.uk
www.5starmortgagebroker.co.uk
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