The two most common questions that crop up in a first meeting about mortgages is ‘How much can we borrow?’ and ‘What’s it going to cost?’ First, we need to start understanding your budget.
Understanding Your Budget
In a previous blog, we have explored why mortgage lenders are required to confirm your ability to afford a mortgage and what information lenders look at to do this with. We now want to start to breakdown what YOU can do to understand your own expenditure and how this can help you and your adviser start to answer those two questions.
Say to most people ‘Can you write down how you spend your money?’ and they break out into a cold sweat. Most of us (mortgage advisers included!) are not adept at balancing our own books on a daily basis. We only do it when we have to so, if you prefer to spend your evening working through another episode from your favourite box-set rather than analyse your last month’s bank statement to see why you have no money left then you are in the right place!
Income
That being said, trying to get a grip on what’s coming in and what it’s going out is the first step to understanding your own budget and in turn being able to discuss this to your advantage with a mortgage adviser. There is no need to read on if you can complete this task without a sigh. Calculate how much you have earnt since you started working. Now, how much of it have you got left?
Essential Expenditure
The next step after realising that you need to understand your outgoings is to begin with a blank sheet of paper (or excel spreadsheet) and calculate your average income. For most people, we suggest working out the average over the last three months (generally excluding any one of windfalls e.g., annual bonus etc.). Next, look at the direct debits that are regularly coming out of your account which are normally best listed under ‘Essential Expenditure’ i.e., contractual so for example existing mortgage or rent payments (these are likely to be replaced long term but for the purpose of this exercise, having an idea of what they are is helpful), utility bills, council tax, mobile phone, food shopping, care costs, and gym membership.
Non-Essential Expenditure
Now the fun bit. Work out a figure for how much you spend on other items which can probably come under a ‘Non-Essential Expenditure’ heading. This is normally items which you pay for regularly but could do without if need be e.g., cash withdrawals when out socialising, coffee shop purchases, daily lunch payments etc.
Your once blank piece of paper should now show three areas of information…what you have coming in on average (A), what you have going out on average that you HAVE TO PAY for (B) and what you have going out that is nice to have but not contractual or essential (C). Then take A, minus B and decide how much of C you want to leave in. The final figure should then be the starting point of a budget of what you can afford for you to discuss with your mortgage adviser.
In terms of our two questions at the start, the starting point to answer these is going to be determined as much by you as anything else and will generally be the same ‘No more than £X per month’.
If you would like to arrange a call or meeting with one of the Resolve Financial Solutions team, then please get in touch.
*Please note: Your home maybe repossessed if you do not keep up repayment on your mortgage.