The most expensive thing you are likely to buy in your lifetime is a house, but luckily, mortgages allow you to spread out your payments over a long period of time.
This doesn’t however, only mean that a house is affordable to you. It’s very crucial that you understand exactly what risk you’re up against: if you don’t make your mortgage payments, you could lose your home.
It used to be much easier to calculate mortgage affordability. Before it was a loan-to-income ratio to work it out affordability. So example, if you earned £100,000, you would be able to borrow between three and five times that amount – in this case, up to £500,000. This is still useful as a guide, and you can use our online calculator .These days, most lenders like to use an affordability assessment and ‘stress test’.
“Lenders now legally have to test whether or not a borrower can afford a mortgage”
In 2017, The Bank of England was concerned that, with the low-interest rates, lenders will be lulled into a false sense of security and start offering high-risk mortgages. Because of this, the BoE introduced new rules. Lenders are now legally obliged to test whether if a borrower can afford a mortgage before they can offer one.
The test is designed as a stress test to check the borrower’s ability to manage potential increased interest rates throughout their mortgage. The new rules set by BoE mean that lenders need to apply an interest rate stress test of 3 percentage points above the rate that will apply when the introductory mortgage offer ends.
If a lender believes you might not be able to afford your mortgage they could reject your application or limit the amount you can borrow.
For this reason it is essential that you check that you can afford the mortgage by calculating the stress test’ on your own.
When calculating your own stress test, it is best not to just think about the cost of the mortgage. Also consider the other costs of buying a new home, this includes moving expenses or house maintenance and building costs and legal fees.
With this, you take the maximum interest rate on the mortgage deal you are wanting and add 3 percentage points to it. An example, your Mortgage is £300,000 over 25 years and the interest rate is 6.5%. In this case, you have to calculate your monthly payments at 9.5%interest. This calculation is slightly tricky to make because the interest you pay will change as you pay back your mortgage. Fortunately, Azembel has a few more handy mortgage calculators to help you. Our MortgageCalculator shows us that a £300,000 mortgage at 6.5% would mean monthly repayments of £1842.26.
Not a stress test is not required if your mortgages rate is fixed for five or more years, then. Because of this, you could be able to borrow more.
If you’re not sure if your calculations are correct, or you think you should be able to get a better mortgage deal, then why not speak to us and get some mortgage advice from our experts? Our mortgage brokers will be able to tell you exactly what you can expect based on your circumstances, and may bring up crucial factors you might have missed. Get in touch with us by phone or via our contact page to find out more!