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Your mortgage – how much is too much?

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Profile photo of James Daley James Daley
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In this troubled economy you’d expect mortgage lenders to be cautious about lending. So why are they still handing out massive mortgages when it’s their job to ensure people can meet their repayments?

I’m selling my flat right now (a ‘spacious two-bedroom flat in leafy Wandsworth, perfect for first time buyers’ for anyone who’s interested), and am about to take another notch up on the housing ladder.

When I say “notch-up”, however,  I’m not talking about the size of the property, but the size of the mortgage.

Can I afford this mortgage?

When I called my lender to ask them how much they were prepared to lend me, I was expecting to be rather underwhelmed, given the tightening in the credit markets over the past few years. But in fact, they said they were willing to hand me more than 4.5 times the joint incomes of my wife and I – substantially more than I was ever offered before the credit crunch set in.

My first reaction was to hit the web, and fawn over all the amazing properties that were now in my price range. But when I paused to think about how much the monthly payments would be if we extended ourselves to the max, I wasn’t sure how we’d make ends meet.

I know many friends who’ve taken that leap, borrowing more than they could realistically afford, and leaving themselves dangerously exposed in the event that interest rates were to rise.

Avoiding temptation

Over the past 10 years, we’ve seen interest rates broadly moving on a downward trend. But if inflation picks up – as some still predict it may – anyone who’s taken out mortgages at the very edge of what they can afford will find themselves in for a nasty shock.

I don’t think these decisions should be left in the hands of consumers. For us, it’s too easy and too tempting to make the wrong decision. Instead, lenders should be exercising constraint, and making sure that borrowers could still afford their mortgage if interest rates went up considerably.

Thankfully, I had a brief moment of sanity, which could save me a lot of pain over the years to come…

Comments
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charlie bucket says:
18 July 2010

This is like credit card companies trying to give you high credit limits that you don't need, or automatically trying to give you higher limits on your cards without asking you whether you want them.

Banks talk a great PR story in trying to help people deal with their money responsibly, but the reality is they just want you to keep borrowing, borrowing, borrowing and borrowing, as that's where their income comes from.

How can we expect banks to set lower borrowing limits to regulate this consumer risk themselves, when their corpoate interest and greed is always going to be in the opposite direction? Isn't now the time we have some proper regulation around our borrowing situation?

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ria says:
20 July 2010

My husband and I were recently offered an additional £100k to top up our mortgage by our bank manager at Barclays, without applying for it. We decided to decline the offer. We can only assume that Barclays were trying to bring their lending figures up (to meet targets?) by offering extra mortgages to those with good credit rating.

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richard says:
2 August 2010

Hmmm.

In all honesty – I think it is a joint responsibility.

When I wanted to buy a house – I roughly worked out how much I could AFFORD to pay back monthly bearing in mind my salary would rise – worked out what that meant over 25 years with the then current interest. Came to an overall figure for a house in London

THEN I contacted mortgage companies to find if one would loan me the money – the fourth one agreed to be prepared to loan me the money. I had a good steady job (wife’s salary wasn’t considered as we wanted children).

THEN I looked for the house at that price.

THEN the mortgage company inspected the house as being worth their investment. – It was solidly built.

I then bought it.

As far as I’m concerned – borrowers and lenders are equally irresponsible if they agree to unrealistic sums. In fact the "credit crunch" is entirely due to this irrespnsibility.- both exhibiting GREED – one for unrealistic priced homes – the other for profit.

Regulation is needed as both sides are becoming more and more irresponsible – but will the CON-DEMS do it? Highly unlikely.

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