When you apply for a mortgage loan, your lender will use your income and outgoings to calculate the maximum amount you can borrow. Although a lender may offer you the maximum loan for a new home, buying a home at the top of your budget could compromise other financial goals, so it is important to consider your financial commitment carefully. We have put together a guide on what you should consider when you are deciding on how much you should borrow for your home loan.
Will it benefit you in a positive way?
When looking at maxing out your borrowing, you should consider whether it is going to benefit you to do so, otherwise, there may not be much point in doing so. It is important to consider the risks that come with maxing out your mortgage, and in some circumstances, stretching your borrowing isn’t always needed if it is just for the sake of it. You should ask yourself a couple of very important questions; do I need to max out my borrowing, is it a good investment, and will it put me under any form of financial pressure, now and or in the future?
A mortgage can be a cost effective way of borrowing
Stretching yourself on your mortgage borrowing can be a good financial investment because interest rates on mortgages tend to be lower than any other form of borrowing as the loan is secured against the property. This means that although you are repaying interest on your home loan, because you can spread the repayments on your home loan over so many years, the amount you’ll pay back every month is more manageable, and affordable! Interest rates on mortgages are constantly changing, and the amount of interest that you pay will change over time, and it will also depend on the type of mortgage that you have.
It may create more financial risk
Borrowing the maximum amount that you can afford will mean you’ll have higher monthly payments, and therefore more possible risk. Your finances, future plans and how much debt you can comfortably handle will need to be considered. Taking out a mortgage does not just involve assessing how much money you have today, but also your future financial situation for the duration of the loan term, and whether you will be able to continue to make the full payments on time for the length of the loan. Even if you can, you may need to consider how the payments will affect other aspects of your life, and most importantly your ability to deal with sudden or unexpected financial changes.
How stable is your income?
There are a number of factors which could effect the stability of your income and employment. These could include starting a family, getting a divorce, changing careers or having an income based on commission. These factors can contribute to how stable your income is, which could effect your financial situation in the future. Financial set-backs can occur at any time, and often unexpectedly, so although you may be able to afford a maximum mortgage now, it is important to look to the future and make a sensible financial decision which takes into consideration unexpected financial troubles.
Your mortgage payment isn’t your only cost
Your monthly mortgage payment isn’t the only cost that you will have as a homeowner. Once you own a property, you’ll have property taxes, insurances, utility bills and maintenance and repair costs. These should all factor into your budget, as well as how much you spend on your home, and how much you look to borrow for your mortgage.
Rather than allowing a lender to determine how much you can afford to borrow for your home, you could instead make a detailed financial budget that factors in all of your personal goals. You may want to account for other objectives which will require financial commitment, such as retirement, traveling or investments. If you begin your mortgage application with a focused plan, and a clear idea as to what you can afford to pay each month, you may not need to max out your budget.
Our team of qualified financial advisers can provide you with high quality and focused advice, to help you plan for your future by understanding your personal finances, and finding you the most cost-effective product on the market.
Your home may be repossessed if you do not keep up repayments on your mortgage.