The general rule of thumb is that you should not spend more than you earn, except if you’re planning to buy a home. When buying a house, you should not spend more than three and half times your annual salary.
Avoid getting into debt by consulting online calculators before approaching a mortgage company, so you know how much money you have available for purchasing a house. Many people first look at a house and then try to make their finances work for them.
Don’t only negotiate with one bank to find a mortgage, but consult several until you find the deal that suits you best. You might also want to consider purchasing mortgage insurance.
Just because banks may offer you a loan of 28% of your gross salary doesn’t mean you can afford to take it, however. Consider the country’s current economic situation with rising food and utility bills and take a hard, realistic look at your potential repayments.
Will you have major financial responsibilities in the near future that don’t currently exist? Are you planning to have children or take up an expensive pastime? All the factors you can think of that could have an impact should be considered.
How much can you really afford to borrow?
First of all, review your credit report to see if all the information is up to date. If you’re renting, your rental expenditure is a good indicator of what you can afford to put towards a loan. Make use of online calculators to obtain an approximate figure.
Most loans allow 28% of the applicant’s gross salary and total debt repayments of up to 36%. If you want to live in your new house for less than three years, then a variable interest rate would be the best option for you.
This type of mortgage generally starts at a lower interest rate when compared to the fixed rate mortgage. A fixed rate will protect the home-owner who’s planning to live in the house for more than five years from rising interest rates, although the longest fixed-rate term in the UK is usually 10 years. Do you want to pay off your house in 15 or 25 years? Most opt for the latter as the payments are lower, but beware of the high interest, which could lead to an additional 30 principal payments.
Compare the mortgage rates of various lending companies and add up the total costs of each lender before settling.