Q I'm interested to know what the recommendations are regarding what proportion of our net monthly income should be going on mortgage payments. We're currently on a very low rate (2.5%), but we are looking to move to the south east and increase the mortgage.
Based on the amount we're looking to borrow I've calculated monthly repayments at 5% to make sure they're still affordable, as interest rates can really only go in one direction now, but not sure if I'm still being over-cautious. SH
A There's nothing wrong with being over-cautious. Making sure that you'll be able to afford your mortgage if interest rates rise is precisely what the Financial Services Authority (FSA) would like lenders to do when assessing mortgage affordability. The FSA is worried that current low mortgage rates are disguising the full impact of unaffordable lending and the true extent of consumers' vulnerability to a rise in interest rates.
As to what proportion of your income should go on mortgage payments, there seems to be a general view that if you spend more than half your income on servicing debt of all types – not just mortgage – you are heading for trouble. Some experts suggest that the total amount you pay towards your mortgage should not exceed 28% of your gross (rather than net) income. And you should make sure that you don't go over 36% of gross income for the total amount you spend on all borrowing, including mortgage.
The newspaper web sites have wonderful material and articles available.
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