As an adult, a day will come when you decide to get a mortgage. While there’s nothing wrong with this, there might be something wrong with how you go about doing it. And one of the biggest mistakes you can make is borrowing more than you can afford.
Determine how much of a mortgage you can afford before applying for one. Remember the cost of a mortgage goes beyond just the cost of monthly repayments. An easy way to determine how much of a mortgage you can afford is with the aid of an online mortgage calculator.
Most mortgagors determine if an applicant can afford the mortgage she is asking for by scrutinising the individual’s income and outgoings. A mortgagor will determine if you can afford a mortgage by looking into:
1. Your income
Depending on your circumstances, this will include your basic income and income from sources such as financial support, child maintenance, pension or investments, or from secondary sources of income, and so on. The mortgagor will look at your bank statements and pay slips as evidence of your income. Self-employed individuals will need to provide evidence of paid income tax, bank statements, and business accounts. This is usual practice, as they will merely be looking for a view on your finances and your ability to repay on a mortgage from their financial institution.
2. Your outgoings
Getting your credit report in order before applying for a mortgage is important as the mortgagor will look into it. Aspects of the credit report that will be focused on include credit card repayments, insurance payments, maintenance payments, if there are any other active loans, and if utility bills are paid. The cost of all these alongside an estimate of your living costs will determine your capability to make repayments. The mortgagor may also ask for recent bank statements to back up the figures you have provided.
3. Future changes that may affect your ability to pay
If the interest rate increases or you lose your source of income or other possible life-changing circumstances, the mortgagor would like to know if you will still be able to make repayments.
How much can I borrow?
Look at your monthly expenses and come up with an estimate of what you can expect to spend every month. What you have left after your monthly expenses is what you will have to take out from for monthly loan repayments.
Because most banks are strict with their calculations, they will probably offer you less than you think you can afford. But don’t be disappointed because they are probably doing you a favour. When you should be worried is if a bank gives you more than you think you can afford. In such a scenario, only borrow the amount you need.
Getting your own home is one of the long-term financial goals that many of us will spend our entire career working towards. With some sensible financial management, you will be able to secure a mortgage that suits your own specific financial needs.