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Can you afford your mortgage?

by Sarah Modlock

It's the one bill that you must always pay on time but it's also the biggest you face each month. Amid concerns of over-borrowing, the Woolwich has published figures which show that the amount of our income that we use each month to pay our mortgage has increased. But this does not mean we are all on the brink of bankruptcy.

The figures - based on 1.3 million current accounts - show that the proportion of household income spent on monthly mortgage payments across England and Wales has increased in May to 18.5% of average household take home pay. This up by 0.3% from April. However, data over the last six months shows that the cost of servicing a mortgage has stabilised at around the 18 – 18.5% mark - an indication is that this is much lower than the highs seen in 1990.

'The mortgage affordability numbers show that the concern expressed by some commentators about affordability is probably over done,' says Andy Gray of the Woolwich. 'Our figures indicate that nationally the cost of servicing a mortgage is still affordable for most.'

London's mortgage burden reached its highest in November 2004 with 23.2% of income spent on mortgages; this has fallen steadily to 22.8% in May 2005. The South-East reached its peak in December at 19.2% and has fallen to 18.7% in May 2005. However, Wales has just reached its highest level of 16.2% in May 2005, whilst the North-East, Yorkshire, North West and East Midlands reached their highest levels in February and March of 2005 and continue to hover around their peaks, suggesting that regional house price increases continue to push up the mortgage burden for those outside London and the South-East for the time being.

Andy Gray, continues 'The signs are that the cost of servicing mortgages has at least leveled out and in some regions started to fall. This would suggest that if there are no further base rate increases, and with little house price inflation, there should start to be a fall in mortgage servicing costs relaxing the current strain on consumers' pockets and potentially adding a boost to other areas of the economy, such as retail sales.'

What if?

If only your new home came with a magic ball so that you could spot interest rate rises coming and curb your spending. Sadly not. Whether you are setting up your first home loan or re-mortgaging, it is easy to calculate what you can afford based on current rates of interest. If rates rise your payments will go up and over the full term of the mortgage you could end up paying a great deal more than you expected. This explains the appeal of fixed-rate loans for many.

Money watchdog the Financial Services Authority produces useful information on affordability. It's 'what if?' mortgage repayment tables (below) highlight the impact that rate rises could have on repayment and interest-only loans. It is another good reason to keep an eye on the expiry of your fixed rate deal if you are on one. Falling off the end of a nice fixed rate could cost you hundreds of pounds.

Mortgages - Examples of the effect of interest-rate rises

Example one - repayment mortgage

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

Example two - interest-only mortgage

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

How much will it cost?

With so many useful mortgage calculators around, it is easy to do your homework. Toolkits like the one from Bradford & Bingley and Yahoo! show you how much you would have to repay each month based on the size of the loan, the interest rate, term and type of the mortgage. You can also find out roughly how much you would be able to borrow based on your income. The flexible mortgage calculator gives you an indication of the saving you can make using the overpayment feature of a flexible mortgage and you can even get their wizard to help you assess and select the type of mortgage that could suit your own particular circumstances. No salesman required so you can carry on to make an application online once you have finished number-crunching.

Protect your home

Don't forget to:

•  Plan your budget based on what you might have to pay in future as well as the initial cost.

•  Try not to take the maximum mortgage on offer - just because you can afford it now, doesn't mean you can afford it in the future.

•  Think about whether you need a fixed rate so that you know your mortgage payment won't go up for a given period - don't forget that if rates fall, your payment won't.

•  Build up your savings so that in an emergency (for example, you lose your job) you can still afford to pay your mortgage and bills for a short time.

•  Work out how long you could live on your savings if you lost your job.

•  Check what benefits your employer would provide if you became ill.

•  Consider insurance - various products can protect your mortgage payments for a short time or insure you in the event of redundancy, critical illness, or accident. You should consider these but make sure they meet your needs: there are restrictions on when and how much they will pay out. Make sure you understand the limitations of any policy and how it protects you.