The number of homeowners in arrears with their mortgage repayments fell to a record low in the first three months of 2018, according to new figures from UK Finance. UK-wide, there were 78, 800 homeowner mortgages in arrears of 2.5% or more, a figure which is 8% lower than the same time last year and the lowest since records began in 1994.
Buy-to-let follows the trend
The same report found a similar good news story in the buy-to-let mortgage sector. UK Finance reported 4, 500 BTL mortgages being in arrears of at least 2.5%, which is 6% lower than figures from the same period last year. This figure is particularly encouraging in a market where an overhaul of mortgage checks and tight new regulations for landlords left many worried they would struggle to meet their financial obligations.
How much can I borrow for a mortgage?
Since new regulations were enforced following a review of the mortgage market by the Financial Conduct Authority in 2014, lenders now use an affordability assessment to work out how much they are willing to lend their customers. This means that as well as capping the loan-to-income ratio at 4.5 times your income, they will also assess what level of monthly repayments you can afford based on your monthly living expenses. Lenders will also take into account your age at the time of applying for the mortgage. If you would like to get a rough idea of how much you can borrow and how long it should take to pay off, free online calculators are widely available.
Should I borrow the full amount available to me?
The amount you personally feel you can afford to pay back into a mortgage will depend on many variables aside from your debts and financial commitments. Different people will feel comfortable with varying levels of debt. For example, some people are happy to forgo holidays and other luxuries if it means they can buy the property they want, while others will be less comfortable with sacrificing a large part of their disposable income. Certainly a mortgage of 4.5 times your annual salary is a huge financial commitment to take on and it’s not surprising that many will baulk at the prospect of shouldering such an onerous long-term debt. Also, if you are anticipating a significant expense in the future, such as private school fees, you should take this into account too.
What else should I take into account?
When assessing your ability to repay a mortgage, your lender will also do a stress test to assess the impact of possible lifestyle changes like losing a job or taking a break to have a baby. They will also take into account how a rise in interest rates would impact how much you can afford to pay back each month. While experts believe we are unlikely to return to the double-digit interest rates of the early 1990s, the Bank of England has indicated that rates are likely to continue to rise from the 0.25% to 0.5% announced in November 2017, the first rise since July 2007.
Proceed with caution
The recent figures showing the dramatic fall in mortgage arrears is a good sign that the new regulations that came into effect after the financial crash are having the desired effect by forcing people to borrow more responsibly. That said, it is always a good idea to recalculate your monthly mortgage repayments using a higher interest rate than what is currently on offer from lenders to see how an incremental rate rise would impact you.
If you would like expert advice about buying or selling a property in the Market Harborough area, please call us on 01858 450 020.