Getting a new property is an exciting time and whilst it may be tempting to borrow the absolute most that you are able to, it is critical that you are smart with your budgeting before you apply. I was helped greatly by the team at Accelerate Mortgage when I bought my property back in 2018. Were it not for the team there then I may very well have gone about things the wrong way, and they were superb in helping me to budget properly for the mortgage which I eventually took on.
If you are considering buying a new property or your very first property then here is how you can put together a smart budget plan which will help you to then decide how much to borrow.
Problems With Poor Budgeting
The mistake which many will make is to assume that their budget will be the total amount that they have, once they have subtracted their other spends from their salary. The truth of the matter is that your budget should be around 50% of this figure. When you max out your available income like this, you restrict yourself greatly in so many areas of your life. You have to still consider savings and the risks involved with potential future problems when you are budgeting.
General Rule of Thumb
Generally speaking you should be looking at a budget for your mortgage which is going to be 28% of your pretax income. At the very most you should be considering 40% of you pretax income. Any more than this will open you up to a high level of risk. Those going for 40% should be doing so if they are in this along with a partner, so as to mitigate the risk. Many forget that whilst everything in their lives may be comfortable at the moment, this may not last. Things can change very quickly in life, job losses, divorces and even death can alter your financial situation and that is why you shouldn’t greatly expose yourself with an expensive mortgage.
Considering Your Future
As you budget it does make sense to think about your future plans. For example if you are in a career whereby you will continue to rise ups through the ranks, then you may wish to take on a little extra with regards to the mortgage. For example there are many who are working in low paid positions as they train, and are confident that once they qualify, that they will be earning a much higher salary. Also consider further plans regarding your family, if you wish to have children ini the future then that too will become a cost that you will have to incur, giving you less spending power.
The smart move here is to budget that 28% and then look to get a mortgage which you are able to overpay. This way you can commit to a larger payment each month, helping to bring down the mortgage, and if you can’t afford to overpay all of the time, you won’t have to.