Should I Borrow Five Times My Income?

In years gone by, you might have been able to borrow up to five times your annual earnings. (Now you’ll be hard pressed to  find a mainstream mortgage lender willing to lend more than three-and-a-half times your income).

But even if these high ratios come back is it wise?

Borrowing this much is very expensive.

The monthly payment on a £150,000 repayment mortgage at an interest rate of 6 per cent is more than £966 a month.

That’s an awful lot of money to part with out of a take-home income of around £1,900, especially when you have council tax, insurance, utility and food bills to pay.

It’s also very risky.

If the interest rate on your loan rose to 6.5 per cent, the monthly payment would increase to £1,013.

At 7 per cent, it would be £1,060; at 8 per cent £1,158, and at 10 per cent it would be £1,363.

You may think mortgage interest rates could never rise that much, and let’s hope they don’t – but no-one can know for sure.

As anyone who had a mortgage in 1989-90 will tell you, in those days people were paying interest rates of 15 per cent and above.

But even if rates don’t rise, what if you lost your job or were too ill to work? How would you manage then?

State mortgage help is very limited – and if you can’t keep up the repayments, your mortgage lender can take possession of your home.

To find out more about state help, read What if I get into financial difficulties?


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