Publication date 28 October 2019
Are you a fan of those home buying programmes they show on television? If so, have you ever noticed how often buyers are presented with properties that are just above their budgets? Estate agents show the more expensive houses in order to gauge just how firm the client’s budget is.
Let’s be honest with ourselves. It is easy to be tempted to push the budget by a house that seems to tick every box on the list. The temptation can be even stronger if the houses you previously looked at didn’t come close to ticking as many boxes. And yet, pushing the budget is not a wise idea. What might seem worth paying for today could end up causing financial problems tomorrow.
As further evidence, here are five reasons to not push the budget on your mortgage:
1. Interest Rates Change
The way mortgage lending is structured here in the UK leads consumers to accept variable rate mortgages more frequently than buyers in other countries. As such, UK home buyers are much more easily affected by changing interest rates. That is a problem when you push the budget. Why? Because interest rates change all the time.
Imagine contacting a brokerage in anticipation of buying your first home. You provide all the financial information and make it known that you’re interested in a variable-rate product. According to this mortgage brokerage, you will be pushing your budget on a variable-rate product unless you reduce your expectations and look for cheaper houses. What do you do?
Pushing your budget anyway might get you the house you have your heart set on. But if interest rates go up next year, you might find you cannot afford the higher payments. Suddenly that house doesn’t look as attractive as it did the day you bought it.
2. Health Emergencies Arise
Much of life is unpredictable. However, such unpredictability can be so devastating when it affects your health. A single health emergency that puts you out of work for an extended amount of time could ruin everything you have worked so hard to build. Just one illness could cost you everything – including your home.
A smart mortgage adviser would recommend that you not push your budget just to buy a house. He or she would recommend buying something cheaper, then taking the extra money you would otherwise spend on the mortgage and put into savings instead. That way, you will have a cushion if a health emergency does strike.
3. People Are Made Redundant
Just like health emergencies arise, redundancies happen. It is a reality of life. Even in the healthiest economy, businesses still run into financial trouble that leads to trimming the workforce. Those unlucky enough to be made redundant suddenly find themselves on the street with no income and no way to pay their mortgages.
If your budget is already pushed to the limit by a house payment you can barely afford now, what would you do if you were made redundant? Adding to the stress of not having work is the real risk of losing your home. You do not need that extra stress. It is better to buy something cheaper and put money away for just such an emergency.
4. Additional Borrowing is More Difficult
Credit is rarely approved without a creditor first looking at your current financial situation and past credit history. Here’s the thing about pushing your budget on a mortgage: you might find it more difficult to obtain additional credit because you are already stretched so thin. Creditors will see you as being too big a risk.
Pushing the budget on your mortgage could mean you cannot get a loan to buy a new car. It could mean you cannot pay for elective medical care not provided by the NHS. You might not be able to get a credit card or take out a loan to pay for your child’s university education.
5. You Have Other Bills to Pay
If the previous four reasons are not enough to convince you, perhaps this fifth reason will: you have other bills to pay. If you are like most of us, you will go into the mortgage game with other outstanding debts. Perhaps you have a car loan and a bit of credit card debt. That existing debt is costing you money every month it remains outstanding. Pushing the budget on your mortgage will make it that much harder to pay off those debts.
It would be far wiser to buy something cheaper and put the extra money that would otherwise go into your mortgage toward paying off your other debts. You will save money in the long run by paying less cumulative interest.
It is easy to be tempted to push the budget on a mortgage. That is the nature of home buying. You see something you love, and you feel like you deserve to have it. So, you are willing to push the budget a bit. Be wise and don’t do it. Stay at or below your budget. You will be better off in the long run.