Can you afford a mortgage or loan?

Taking out a mortgage is one of the biggest financial commitments you can make, both in
terms of the amount you borrow, and the time you may take to repay it.

Are you sure you can afford it?

You may be able to afford the repayments now, but if you borrow a large amount over a long
period of time think what could happen if, for example, your income falls or you lose your job. Or what if interest rates rise and your monthly repayments go up?

How could your income fall?

Your income could fall if:
■ you lost your job, or had to take a drop in income;
■ you or your partner stopped work to have a child or to look after a dependant; or
■ you became ill and couldn’t work.


Could you keep up your mortgage payments if your income falls?

How could your mortgage payments go up?

■ Your mortgage payments to your lender could go up (or down) if interest rates change.
Mortgage interest rates are related to the interest rate set by the Bank of England and your lender will usually apply some or all of any change to your mortgage.
■ Unless your mortgage rate is fixed for the full term of your mortgage, this will affect you.
■ Often, special rates are for a set period only, so when this comes to an end your payment will change – it could be much higher. Although interest rates have been stable over the
past few years, this could change. In the past, interest rates have risen from 7.5% to 15% in just a few years. Interest rate rises could increase your monthly payments considerably, making it difficult for you to afford them.

The following examples show how different interest rates can affect your payments.

Example 1: repayment mortgage

You borrow £100,000 over 25 years on a repayment mortgage, initially at a rate of 4%:



Example 2: interest-only mortgage
You borrow £100,000 over 25 years on an interest-only mortgage, initially at a rate of 4%:

As you can see clearly, there is a significant difference in the mortgage repayment money in the two schemes.

Don’t forget that rates could be higher than those assumed here.

In the next article, let’s cover some more details of the mortgage affordability.

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