By Peter Kenny
The first step to finding the right home for your needs is to work out how much money you can afford to spend on the property. Although you want to get a good property, you also want it to be affordable, and knowing what you can spend will help you to find the right home at the right price. If you are unsure about how much you can afford to spend on your mortgage loan, then here is some advice to help you work it out.
How much do you earn?
Your mortgage loan will be secured against your new property, but to work out how much you can borrow the lender will look at your earnings. They do not just want to know how much money you have now, but what you are likely to earn over the next 20 or 30 years. Mortgage loans last a long time, and so the lender has to see that you will be able to pay off the loan both now and in ten years' time. The more you earn and the more stable your job, the better the chances of you getting a larger mortgage.
Credit history
Another important factor that determines how much you can afford is your credit history. The lender will do a credit check to make sure that you are a responsible borrower, and that you don't have any past financial problems. Before applying for a mortgage loan, you should check that your credit report is in order and that there are no mistakes. A good credit history will allow you to borrow more.
Timescale
How much you can afford to borrow will allow depend on how long you want the mortgage loan term to be. If you want a long mortgage term of 25 years, then your monthly payments will be much lower, but you will pay back a lot more in interest. However, getting a mortgage loan term of 15 years will mean higher payments, but less overall costs from interest. Also, if you are only planning to stay in a property for a few years, it may not be worth getting a mortgage. Changing properties will involve many costs, and so it might be more cost effective to rent until you can afford a property that you will stay in for longer.
Be honest with yourself
As well as the lender deciding how much you can afford, you need to be honest with yourself about your financial capabilities. Just because a lender will loan you a certain amount of money does not mean you can really afford it. If you cut back on everything else then you might be able to afford the mortgage. However, if your lifestyle is more extravagant, then getting a large mortgage may not be a good idea. Try and be conservative, and borrow an amount that you can afford easily. This will make the mortgage loan less risky and allow you to make payments even during tough times. However much you decide to borrow make sure you can afford the payments, because you never want to be in a situation where your house is taken away from you because you cannot pay. Sacrifice that extra bedroom for financial security and you will benefit in the long-term.
About the Author: Peter Kenny is a writer for The Thrifty Scot, please visit us at Personal Loans and Loans
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