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The Real Cost of Mortgages

The subject of mortgages has attracted so much hype and general media interest over recent years. As I write the press attention focused on Northern Rock's much discussed collapse shows no sign of abating. It's hardly a surprise we're all so interested considering that the property market is something that affects pretty much everyone, whether we're already homeowners or are contemplating our fist cagey step onto the property ladder the state of the property market is something that affects all of us.

What often get neglected amidst all this media speculation are the basic issues associated with buying a house and there are few more fundamental issues, particularly for first time buyers, than the simple question of how much you can realistically afford to pay: How big a mortgage can you reasonably stretch to?

Purchasing a house is inevitably going to be pricey, it's bound to be amongst the most expensive things one will ever buy. Needless to say, the importance of getting it right is not something any of us should underestimate, you should be prepared to consider long and hard how far your budget can realistically stretch. The first thing to consider is how much you earn: lenders will generally be willing to give borrowers between three and four times your salary. Those buying with a partner can expect lenders to increase the amount they are prepared to give to you by your partner’s salary. So, if you're on £30,000 you could expect to borrow £120,000, if you're partner is earning £20,000 you might be looking at £140,000. Alternatively you may be offered something like 3 times your salaries combined - in this case that would make £150,000, a slightly bigger loan.

Mortgage providers might be prepared to give you a larger mortgage if, as is increasingly common practice, they consider your financial track record in addition to simple salary multiples. This would involve a lender looking at your statements and outgoings and using this as a consideration in their calculations. Therefore, if you are deemed to have managed your finances well in the past your lender may be prepared to offer you a larger mortgage that they otherwise would have. Conversely, those with a poor credit history are liable to be offered less.

Don't simply assume that once you've confirmed how much you're going to borrow and how much you can afford to spend on the deposit (remember that the more you manage to put down as a deposit the lower you're interest rates are likely to be - it's therefore really worth getting together as big a deposit as you possibly can) this is the last of you're spending. You really need to account for the various additional costs that are bound to emerge before you can consider moving into your dream home.

Aside from the multitude of niggling extra costs such as valuation, survey and legal fees (at a rough estimate you should probably budget about £1,500 for these) the largest single additional cost will probably be stamp duty. This works on a sliding scale as follows: if the property value is under £125,000 then there will be no stamp duty fee, £125,001 and £250,000 will be a 1% fee, £250,001 and £500,000 will be 3% and over £500,001 will be 4%. Of course, for sellers there is also now the added extra cost of a Home Information Pack to factor in, you can probably expect to spend between £400 and £700 on a HIP.

It's also prudent to assess your finances for yourself, don't imagine that because a lender is happy to give you a big mortgage you can actually afford to pay it. Look at your monthly income and expenditure and consider realistically what you can afford. It's important to be honest with yourself and not commit yourself to anything that will significantly stretch your funds - a dream home is not worth bankrupting yourself over. Take a look at one of the many mortgage calculators out there, most big lenders will have one on their website (you can find a Mortgage Calculator at Natwest’s website, on their mortgages page, or the BBC property site for example). Alliance and Leicester are also a leading lender, offering the mortgage calculator service. In addition you can save money and time by checking out a Mortgage comparison site like Moneysupermarket, to keep up to date with the best deals.

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