The truth of the matter is that getting a mortgage is not easy, especially in this time when the market is more competitive, and lenders are stricter than ever. Acquiring the home or property of your dreams can be quite a challenge if you don’t have a very good idea of how to go about it in the proper way. For instance, before you even look for property, you should work out how you will pay the mortgage. This means working out how much you earn and how much you spend each month. Additionally, mortgage providers look at whether you will be able to keep up with repayments if interest rates rise or if your circumstances change – this is called the mortgage stress test, and it part of the mortgage affordability assessment that they undertake. Here’s how you can properly work out your income and expenses before applying for a mortgage.
Determining your income
Although the idea of having your own property is definitely attractive, one of your very first tasks would be to determine your income. You need to know how much you really make each month because this will help you determine how much you can pay for mortgage repayments after all your monthly expenses. Make a list of your earnings, including your actual salary (don’t forget to include overtime and bonuses), your benefits as well as tax credits, other income sources (such as a pension), money you receive for child support or maintenance, and income from savings, investments, other property, and shares.
Determining your expenses
Next, you need to determine how much you actually spend each month. This is trickier, because not many of us have a really good idea of how much we spend, as any Mortgage Wise specialist will confirm. This is where the details count.
Your monthly expenses should include the following: your rent or existing mortgage repayments, your credit card bill, any outstanding debts or existing overdrafts, the cost of child care, payments for child support or maintenance, school costs or fees, electricity, water, and gas bills; phone and Internet bills, TV subscriptions and licences, food and drinks, clothing, toiletries as well as cleaning products, pet expenses, council tax, insurance, payments for pension, payments for a student loan, petrol expenses as well as vehicle maintenance expenses, the cost of travel, and the like.
But as mentioned, there may be other expenses which you may not be completely mindful of. This would include expenses such as holiday expenses, social life expenses (such as going out to restaurants and bars), entertainment expenses (such as going to the cinema, sporting events, or watching concerts), membership expenses to gyms and health clubs, expenses such as alcohol and cigarettes, and luxury expenses (such as gifts).
Future changes that may affect affordability – Mortgage Stress test
Once you have worked income and expenses out, you will have a better idea of what kind of mortgage deal to opt for. As mentioned earlier, on top of the above, providers will take into account your mortgage affordability in event of interest rates rising or a possible change in lifestyle, like:
- a redundancy
- a baby
- a career break
If the lender thinks you would be unable to repay your mortgage in the above cases, they may limit the lending amount.
To sum up, the first point of entry is to work out your income and expenses, followed by a clear hard look at the impact of interest rate changes and lifestyle changes – it is better to have a buffer in what you should be able to borrow and what you actually apply for – this buffer should help you in overcoming the mortgage stress test. When in doubt, it is always a good idea to speak with mortgage advisers who have a better idea of eligibility requirements of various lenders and will be able to help in identifying the lender suitable for you.