Taking out a mortgage is a huge financial commitment, and can see you borrowing upwards of a six-figure sum.
Luckily, you don’t have to pay it back all at once, but it’s still important to work out how much you can afford to pay towards it each month.
People today have so many different outgoings they have to stay on top of; utility bills, car insurance, council tax, mobile phone contracts – to name just a few.
If you apply for a mortgage that will cost you more than you can afford to pay back each month, you’re likely to be turned down – and this can have an impact on your credit history. That’s why it’s important to work out how much you can afford to borrow before you apply.
So how do you calculate your mortgage repayments? Read on to find out.
Use a mortgage calculator
The easiest way to work out how much you’ll pay each month to clear the balance of the mortgage you want is to use a mortgage calculator. Give Ocean’s mortgage calculator a try – just type in the amount you want to borrow, how long you plan to pay it back in and the APR, and it will calculate how much you can expect to pay each month.
Of course, no mortgage calculator can tell you exactly what your monthly payments will be. That all comes down to the APR your lender offers you. However, what it can give you is a good idea of the amount you can expect to pay so that you can work out how much you can afford to borrow.
Draw up a payment plan
When you take out a mortgage, it is secured against the property you buy with it. This means that if you stop making your repayments, as a last resort your lender has the right to repossess your home in order to get back the money you owe them. That’s why it’s so vital to make your repayments on time.
To work out what you can afford, write down your monthly income and take away from this the total sum of all your monthly outgoings. If you pay rent, don’t include this figure as you’ll stop paying it once you buy your home. The amount you’re left with is what you’ll have available to cover your mortgage.
Don’t stretch yourself
First things first – you probably won’t be able to borrow a sum that will mean you using all your spare cash for the month to cover your repayment – and nor should you. Following the Mortgage Market Review of 2014, lenders are now expected to ask you about all of your monthly spending, not just your regular bills. So you can expect to be quizzed on everything from gym memberships to how often you get your hair cut.
These are most likely all expenses that come out of your monthly expendable income. If these aren’t expenses you’re willing to sacrifice, don’t take out a mortgage so big that your repayments will eat into your budget for them.
You also need to be aware that interest rates can go up and down. If you’re on any mortgage other than a fixed, a movement in interest rates could have a direct impact on your repayments. And even an upward movement of just a couple of percent can cost you hundreds of pounds more a month. You should take care to be certain that you have enough money left over each month to cover this increase in case it happens – and the lender you apply to should also check for this. If your finances will be too tightly stretched if interest rates change, your application might be turned down.
By working out how much you can afford to pay each month towards a mortgage, and what your repayments might cost for the size of mortgage you want, you can realistically work out how much to borrow. This gives you a good base from which to start to search for your new home.
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