As a first time buyer or any buyer for that matter you will likely question, ‘how much can I borrow?’  A potentially more apt question is to ask yourself ‘how much can I afford?’  These are both fantastic questions to ask yourself when you are looking at buying and they should both be considered carefully.

 

First of all it is worthwhile looking at various affordability calculators to roughly establish how much you can borrow with lenders.  The calculators aren’t always completely accurate and are dependant on the criteria of the lenders, but they can give you a rough guide.

 

I will outline a scenario for first time buyers and something for them to consider.  Is it worthwhile stretching your affordability to the higher end of what you can borrow?

 

For example, you may be planning to purchase a property for £100,000 using a 5% deposit of £5,000 and loan amount of £95,000.  The calculators indicate you could actually borrow a loan amount of up to £133,000, so therefore you could potentially purchase a property at £140,000 with a 5% deposit of £7,000 and a loan amount of £133,000.

 

If you were to take out a mortgage over 35 years with a 5 year fixed rate; the monthly payments on £95,000 could be between £430 – £450, for £133,000 the monthly payments could be between £585 – £610.

 

If you purchase the property at £100,000, is it a property you could see yourself living in for the foreseeable future?  For a little extra saving towards the deposit you could find yourself in a different property that is more suitable for your long term needs.

 

The above is dependant on how fast you need to move, how long it will take to save up the additional deposit, if you can actually afford the increased monthly mortgage payments and the additional costs such as moving costs and solicitors fees.

 

Before committing to any mortgage it is vital you do a budget plan factoring all the new costs associated with the new mortgage and house, such as; the new mortgage payment, council tax and other utility bills along with key insurances like your buildings insurance just to name a few.

 

Doing the budget plan gives you an idea of what you can afford but it also gives you the opportunity to do a ‘spring clean’ and attempt to reduce your outgoings.  For example by cancelling that gym membership you signed up for 2 years ago but have only been there twice.

 

Daniel Brown BSc (Hons), Cert SMP

26th March 2018

Should You Stretch Affordability