Debt Advice: 7 Things To Consider Before Taking A Mortgage

Editorial Team

Debt Advice 7 Things To Consider Before Taking A Mortgage

Are you considering taking out a mortgage but are hesitant due to your outstanding debts? Taking on a mortgage is a big financial decision and requires careful consideration. Before making a choice, it’s important to assess your financial situation and take crucial factors into account.

In this article, the London insolvency practitioners Hudson Weir have compiled seven things to consider before taking out a mortgage. From planning your budget to comparing deals and keeping an eye on your credit score, we’ll walk you through each step to ensure you make an informed decision. Read on to learn if buying property in the UK is viable for you, and if refinancing your mortgage may be an option.

Note Any Outstanding Debt

Before taking out a mortgage, one of the most essential factors to consider is any outstanding debt you may have. While having debts like student loans, credit card debts, or car loans isn’t necessarily a deal-breaker, it’s important to take into account how this debt can affect your financial freedom, and ultimately, your ability to pay back your mortgage.

Start by reviewing all of your current debts, including the balances and interest rates. Understanding your level of debt, income, and expenses can give you a better idea of your financial capability. Keep in mind that a mortgage is a long-term responsibility, so it’s important to assess whether your income can handle your outstanding debts, monthly payments, and more.

It’s also vital to note that lenders often examine your existing debts when deciding if you qualify for a mortgage. So, if you have a high level of debt, this could reduce your chances of being approved or offer you less favourable mortgage terms. Therefore, always consider your outstanding debts before taking a mortgage.

Plan Your Budget

Planning your budget is one of the most crucial steps before taking out a mortgage in the UK. Without a proper plan, it’s easy to overspend and find yourself unable to make your monthly mortgage payments. To start, create a spreadsheet that outlines all of your monthly expenses, including your utility bills, groceries, subscriptions, transportation costs, and more.

Once you have a clear picture of your monthly expenses, you can estimate how much you can afford and how much you’re willing to spend on a mortgage. Try to calculate the likely cost of the mortgage, including monthly payments and additional costs, such as interest rates, fees, insurances, and taxes.

Many online mortgage calculators can help you determine your mortgage affordability. It’s recommended to check your estimated mortgage affordability against your current income, savings and expenses to ensure that you won’t have any financial difficulties in the future.

Compare Different Mortgage Deals

Different lenders may offer diverse mortgage plans, including variable rate mortgages, fixed-rate mortgages, or tracker mortgages, each with its pros and cons. The right mortgage deal depends on your budget, financial goal, and preferences. When comparing mortgage deals, consider the mortgage term length, repayment options, interest rates, and additional fees. Be sure to shop around and compare at least three different mortgage options. Keep in mind that a small difference in interest rates can make a significant difference in the total cost of your mortgage over the years.

Keep A Close Eye On Your Credit Score

A credit score is a vital factor that lenders use to determine whether you’re eligible for a mortgage, and it also plays a significant role in the mortgage interest rate you’ll qualify for. Therefore, keeping a close eye on your credit score is essential before applying.

Start by checking your credit score regularly with one of the available free credit-reporting services. It’s recommended to review your credit report at least once a year, to ensure that no errors exist and that your credit utilisation ratio is healthy.

If you have poor credit, actively work on improving it before applying for a mortgage. Paying off outstanding debts, paying bills on time, and limiting hard credit inquiries are ways to improve your credit score.

Remember that applying for new credit cards or loans during the mortgage application process can negatively impact your score. Therefore, it’s important to maintain your credit score and limit unnecessary credit applications. By keeping a close eye on your credit score, you can increase your chances of qualifying for a better mortgage deal.

Consider Tax Relief On Mortgages

One of the perks of being a homeowner in the UK is that you may be eligible for tax relief on your mortgage interest. Mortgage tax relief is a scheme that can help you reduce the amount of tax you pay on your mortgage interest payments. It is available to those who bought a property before 6th April 2017 and is gradually being phased out.

The amount of tax relief you can claim depends on your regular income tax rate and the amount of mortgage interest you pay. Typically, you can claim up to 20% of your mortgage interest back in tax savings. You can claim tax relief through the self-assessment tax form or ask your mortgage provider to adjust your tax code so that you pay less tax on your earnings.

Keep in mind that the rules and eligibility criteria of the mortgage tax relief scheme may change over time. It’s recommended to consult with a financial advisor or tax specialist who can provide you with more information about how to claim tax relief on your mortgage.

Is Buying Property In The UK Viable For You?

Buying a property in the UK is a big financial decision that requires careful consideration. Before deciding whether it’s a viable option for you, you need to assess your current financial situation, including your income, savings, outstanding debts, and other expenses.

In the UK, the average price of a house can vary significantly depending on the location, region, and type of property. Therefore, you must calculate the total cost of purchasing a property, including the mortgage and other additional fees, such as solicitor fees, stamp duty land tax, surveys, and removal costs.

It’s also important to consider whether you will be able to maintain your mortgage payments over the long term while handling other financial responsibilities. Additionally, think about whether you need to focus on other financial goals or emergencies before buying property, such as saving for retirement or paying off outstanding debts.

Consulting with a financial advisor like an insolvency practitioner can help you determine your eligibility for a mortgage and provide guidance on how to manage your funds before and after the property purchase. By analysing your finances and other financial goals, you can decide whether buying property in the UK is viable for you.

How About Refinancing Your Mortgage?

If you already have an existing mortgage, refinancing your mortgage is an option to consider. The process involves taking out a new mortgage to pay off your existing mortgage, often to take advantage of better interest rates or save on monthly payments. It can also be an opportunity to consolidate debts or release equity in your home.

Refinancing may come with additional fees, such as exit and arrangement fees, so it’s important to consider the potential cost savings. It’s recommended to consult with a mortgage advisor or broker to understand whether refinancing is the right choice for your situation.

Bottom Line

As with any decision involving a financial commitment, it’s important to weigh up all the factors thoroughly before taking out a mortgage. It is especially helpful to do some in-depth research prior to making this big life decision. From taking into consideration any outstanding debts that you may have, along with planning your budget, it is imperative that all potential tax reliefs are looked at too, as well as the cost implications of buying property in the UK if you’re from abroad. If you’re already a homeowner, you can also look into refinancing your mortgage for potential savings. Overall, no matter what your circumstances are, when done correctly, mortgages can be an incredibly rewarding investment for many years to come. So, bear these 7 points of advice in mind and good luck!