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Homeowning: How Much Can You Afford?

April 26, 2002

It's all very well coming up with the right figures when you're working out whether you can raise a big enough mortgage and deposit - not to mention the rest. But how much can you really afford?

Mortgage lenders will initially look at your gross income -- but you shouldn't! It's your take-home pay that actually matters. You really must check out what you've got left over after you've added up your current monthly commitments.

Ins and Outs

Sit down and make a list of your income and outgoings, and work out what you'd really have available each month to comfortably feed a mortgage. Think about your debts. Do you owe money for other loans, or on your credit cards? Can you re-arrange these debts to ensure that you're getting the best deals? Try and make sure that you have your debts well under control before you even start thinking about buying a house. (Ultimately, the only Good Debt, if you have to have one, is a mortgage because your home can be considered a real investment in the long term. Credit card debt cannot!)

Remember that, just because the bank will lend you money, it doesn't mean that you'll realistically be in a position to pay it back. Ensuring that you're in control of your other expenditure is vitally important because, if you fail to make your mortgage repayments on time, you'll be in deep doo-doo. The lender has first dibs on your house and they can and will sell your home to get their money back. And they will do it when it suits them, not you. The housing market might even be depressed at the time, but they'll have no reason to delay selling - they just want their money. And that's when you'll suddenly find yourself out on the street with your dog, a couple of suitcases, and your toothbrush. (Top Tip - Avoid this scenario at all costs!)

It's also worth noting that if the proceeds of the sale of your house are not enough to cover the mortgage, the lender is entitled to come after you for the rest! You cannot escape your obligations once you've agreed to them - not without going bankrupt, anyway, and that is not a place you want to go!

It is, therefore, essential to ensure that the costs of buying your home are well within your means. You should be able to meet your general living expenses, make your monthly mortgage repayments, and still have some spare cash to add to your savings. Remember that your monthly outgoings are likely to change if you move to a new property. Your utility bills may be higher, as could your council tax and insurance. If you're moving into a flat there could be a service charge to pay for maintenance of the property as well.

If you've salted away some extra money during the good times, you'll have something to fall back on in the hard times. If things become dire, you can use these savings to meet your mortgage obligations while you decide, in your own time (not the lender's), how best to proceed.

One rule of thumb is to aim for a monthly mortgage payment that takes up a maximum of one-third of your disposable income. We have a mortgage calculator that demonstrates how much you can expect to pay each month. It's worth experimenting with a few different rates of interest so that you can see what impact an increase will have.

The bottom line is this: if you want to take out a mortgage, you must be very confident that you will be able to meet your repayments pretty easily. At the very least, you need to know that, if it all goes wrong, you can sort it out in your own time. This way, it will be you, rather than the lender, who controls the situation.

Now you've worked out what your price range is you can start to look for houses. But don't get too carried away because you still need to do a few things before you are ready to make an offer. You need to decide on the right sort of mortgage for your circumstances, find a mortgage provider and get a mortgage certificate.

More: The Homeowning Centre