Should you take out the maximum mortgage you can get?
Updated: 25th Jun, 2024
Author: Charlotte Burton
As a rule of thumb, lenders will let you to take out a mortgage of up to about 4.5 times your household income. But, should you do this?
It's not always the best plan to take out the maximum possible mortgage from your lender. You should consider your total monthly outgoings, and whether you need a safety buffer against risks such as a rise in mortgage interest rates.
Bills
If you were previously renting, as a homeowner you will have new bills that you didn’t have to worry about before. Also, it's worth remembering that a bigger home means bigger bills.
- If you are buying a freehold property (generally houses), you will need to start paying for buildings insurance.
- If you are buying a leasehold property, you may need to pay ground rent and service charges.
- All homeowners are responsible for repairs to their property which can cost 100s-1,000s of pounds a year. This value will depend on the state of a property, its size, and how old the boiler & appliances are.
- Remember to include these costs when thinking about how much monthly mortgage payment you can afford to pay, and/or the size of your future home.
- The size & value of the home you buy can affect your monthly bills.
- Heating bills tend to be higher for bigger homes (depending on energy efficiency). For example, British Gas estimates a 1 bed house or flat spends an average of £183 a month on gas, and a 3 bed house spends £262 a month.
- Council tax will be higher for higher value homes within an area. The council tax bands are usually shown on Rightmove, and you can then check the costs at GOV.UK (for England), gov.wales (Wales) or COSLA (Scotland)
- Consider the size of these bills when thinking about what price range and type of home you're aiming for.
- Moving location when you buy could affect your monthly transport costs.
- Leasehold properties (generally flats) may also need the lease renewed at some point, which is an additional cost.
- Factor these into your monthly outgoings.
Risks
Borrowing the most money you can leaves you exposed to risks, which could put you in a tricky financial situation. Some of these are outlined below:
- In the UK you can't fix your mortgage interest rate for the entire length of your mortgage (e.g. for 25 years).
- This means the interest rate you have to pay on your mortgage will likely change over time.
- Interest rates can go up very high - they went up to 6.5% in 2023, and went over 8% in the late 1990s.
- Would you be able to afford that?
- The less money you borrow for a mortgage, the less your monthly costs will be affected by rising interest rates in the future. If it's an option, consider borrowing less than the maximum a bank will lend you to reduce this risk.
- Falling into negative equity can make it hard to remortgage, and can mean you can't sell up & move.
- Negative equity is when the total amount you still owe on your mortgage is bigger than the price someone would buy your property for.
- In other words, if someone bought your home and they paid you much less than what you paid for the home, and the difference is bigger than the size of your entire original deposit plus any of the house value you've paid off through mortgage payments - then you have negative equity.
- This could happen if the housing market has a major crash, if you paid a lot more for a property than it was really worth, or if something happens to your home that makes it undesirable such as it flooding, developing damp or subsidence.
- The best way to avoid this is by having a deposit of more than 10%, and doing thorough checks on the home you're going to buy.
- There is always a chance of losing your job in the future, and even having to take a lower paying job, so this is worth taking into account too.
- You could take out Income protection or Involuntary Redundancy insurance to mitigate against this.
- If you are planning to have a baby in the next few years, remember you will likely lose some salary if taking maternity leave.
- Legally mothers only have to be paid for 6 weeks at 90% of their normal salary, and then payments may drop to £184.03 a week for another 33 weeks. If you take a full 52 weeks of maternity leave, the last 13 weeks are unpaid.
- Some companies have more generous maternity policies than this, but you should consider this reduction of salary when thinking about monthly mortgage payments, and bills relating to your house size.
- Beyond maternity leave, you might also want to think about the impact of child care costs, or the salary impact of reducing work hours, on the amount you can pay towards mortgage and bills.
