Should you overstretch yourself on your mortgage?

 

Most millennials whose parents bought their house in the 1980s or 1990s will convince you that you should buy a property at the top of your budget or even overstretch yourself beyond what you think is possible or what’s comfortable because your own home is the biggest asset you will ever own. 

 

That may have been solid advice back then when international travel wasn’t as accessible as it is now, luxury cars were only for the wealthy as finance was too difficult to obtain for many and the cost of every other good, we consume was much lower than today. That left the only major asset or luxury item a person could buy was their own home, and your home was your only indicator of wealth and achievement. 

 

But times have changed since then, we want to travel the world, we want to have nice cars, eat out from time to time and spend money on socialising with friends. But we can’t do that if all of our monthly income is eaten up by a huge mortgage payment you have undertaking by overstretching yourself financially. 

 

A huge misconception is that your home is your biggest asset. While there is some truth in that it’s not entirely true. Property prices go up in value collectively and they typically go up in value as a percentage of its current value. This is due to the overall property market increasing because of demand and other economic factors such as inflation, interest rates, policy, and taxation laws. So, when people say that their property has gone in value by 10% and they’re going to sell their property to ‘cash in’ and realise that uplift in value, the next property they look to buy will most likely will also have increased in value by 10%. Meaning there are no better off, they’ve moved sideways. 

 

Your home should be your exactly that, your home. People ask us “Where should I buy?” or “what should I buy?”, with the intention of turning a profit later down the line. But you should buy a property that suits your needs, fits comfortably in your budget and is somewhere you would happily call home. Does the property have enough space? All of the features you need? In a practical location that you like? And are you happy to pay that price for it? If the property does increase in value that’s a bonus. Your home is your safe space, that you can mould into exactly what you want. You can put your personal stamp on it and have total control over every decision instead of being told what you can do with it by your parents or landlord. 

 

It’s not until later life when people become mortgage free and look to sell their home to release the equity they have created. Unless that place is free you are going to have to spend that money you now have sat in your bank account, either by renting or going into care. If you do need long term care or specialist care in later life the equity, you have built can certainly help you live a comfortable life. Your home can become an asset but not until later life when you come to sell it and your personal expenses reduce. 

 

 

Based on my current net income (or our net income if buying together) can we allocate to a mortgage payment? 

 

There is no hard and fast rule to this, it comes down to your preference and budget. One persona may be happy to allocate more of their take home pay to paying their mortgage than the next person. The amount you allocate towards your monthly mortgage payment will also depend on your other outgoings and how much you have left over each month. 

 

If the answer is no, you should reconsider your purchase. If you were off work due to illness, do you have any provisions in place to cover the loss of earnings such as savings or income protection? 

 

Can you afford the mortgage payments on maternity pay? Can you afford the household bills and increased costs that come with being a parent alongside your mortgage payment? 

 

Will buying your home take all your savings leaving you financially vulnerable against future emergencies? Best advice is to keep 3-6 months of living expenses in the bank should you be unable to work, or an unexpected emergency crop up like needing a new boiler or a car repair for example. 

 

Interest rates fluctuate in reaction to market conditions, if rates go up in the future can you still afford your mortgage payments? Best practice is to stress test your mortgage by calculating your mortgage payments if interest rates increase by 2%. Check what the payments would increase to, and think are you able to pay that amount should it happen? 

 

Most residential mortgage lenders allow you to make overpayments each year, typically between 10-20% of your remaining mortgage balance each year. This is a privilege which allows mortgage applicants to pay off their mortgage quicker and reduce interest over the life of their mortgage. This is an optional benefit of your mortgage, which you can choose to use if you wish but you don’t have to. To protect your ability to pay your mortgage and live your current standard of life you set your monthly mortgage payemnt to a comfortable figure and then choose to use the overpayment benefit as and when you feel like it. Rather than being forced to make a higher monthly mortgage payment because you shortened the term of your mortgage as far as you could to pay off the mortgage as fast as possible. You can opt to make an overpayment when you have surplus money at any time, which may have come from overtime, bonus income, commissions earned or inheritance for example. 

 

If you would like to know more about how much you can afford to borrow and what that would look like in real terms, please contact us. This is a free service we offer, and we can give you an idea over the phone in 10 minutes. 

 

01482 205084 

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