Rather than continue talking about debt I thought it would be a change to look at housing again and how much we should be spending on our housing. I have written quite a lot about debt and paying off debt but housing is one of those things that people wish to buy that will more than likely require the taking on of some debt. This is mainly due to it requiring several years to be able to pay for a house out right so it is more than likely that you will need to take on some debt in the form of a mortgage. But one of the most important things to consider when buying a house is your ability to afford the house payments. If you are struggling to save money when you are renting and your rent is not equivalent or more to the proposed mortgage payment then you will need to look at either saving more money or probably not looking at buying but continue to rent.
In the future I will try and look writing a post on the advantages and disadvantages of renting over buying.
With the Normal Person now earning an average of £26,000 – £27,000 a year what is happening with your salary.
Straight away about £6,000 will be taken off you to pay taxes and national insurance. You may also have some pension money taken straight out of your salary before it gets paid into your bank this could be anything from £3,900- £520 or you could put nothing into your pension. Therefore you could end up with between £19,480- £16,100. These mean for each month you have between £1623 – £1,341 to spend. Really you should try and spend less than one third of your salary on housing preferably closer to one quarter of your salary. This means you should try and spend less than approx £541 per month on a mortgage or on rent to pay for housing. As you can see for a single person it will be quite difficult to try and rent or buy a house for this amount especially if you live in the south of the UK where rents and house prices are significantly higher than houses in the north of the UK.
Working on this idea someone could borrow about £120,000 with a £20,000 deposit this would allow the person to afford a house costing £140,0000 the mortgage of £120,000 would cost from approx £500 for a 2 year fixed rate to £535 for a 5 year fixed rate. You can get a cheaper rate than these but these are mainly variable rates mortgages which currently I would shy away from taking. This would mean that if interest rates began to rise then your payment would go up by a certain amount depending up on the increase in interest rate and how much your bank decides to increase their rate by.
One of the other criteria that mortgage providers will look at, is only lending a certain multiple of you salary therefore for someone earning £27,000 may be able to borrow up to five times their salary this would give a maximum mortgage amount of £135,000. In the past it was more a general rule that a mortgage of three times your salary was used. This would give a mortgage amount of £81,000. However this is rarely used now.
One of the other things we need to consider is if you have a mortgage you will need to take out house insurance and life insurance to cover the cost of your house should anything happen to you or the property. House insurance would be required as if there was a fire or some other event which destroys the house then you would still need to pay the mortgage on the house. The mortgage company would still want their money paid back. Life insurance is really only necessary if you have people who will need to stay in the house if something happened to you and the other person could not afford to pay for the house. This is of most importance if you have a child, partner or spouse who could not afford the house.
When you buy a house you also need to consider any money you will need to spend on keeping the house in order and maintained as for a rented property this is usually looked after by the landlord or letting agency.
That’s all for now but let me know what you think either in the comments or via our facebook site https://www.facebook.com/TheNormalPerson/
The Normal Person