Your low income can limit your financing options when you want to buy a home. In the UK, banks and building societies typically lend a maximum of 4.5 times your annual income. That means if you make £20,000, you can only borrow up to £90,000. The same limit applies if you’re borrowing with someone else and combining your low income.
Some people can borrow up to 5.5 times their income, but they are usually professionals like accountants, lawyers, or doctors. As such, their income will likely rise fast, so lenders don’t limit their borrowing capacities as much.
Luckily, an experienced mortgage broker can refer you to a lender with the most manageable terms. But exploring your financing options can still feel intimidating. After all, a low income often puts you in a tricky position. You may be able to buy a home now, but how will you repay your mortgage?
Use these hacks, and your circumstances will hardly affect your ability to repay:
1. Review Your Other Debts and Their Due Dates
If you use a credit card, try to avoid making minimum payments. It may seem practical, but it risks your credit further. Avoiding credit cards altogether won’t help either. Instead, use your credit card sparingly and pay off its full balance on or before its due date.
Make full monthly payments on your other loans as well. And it is crucial to pay within the given period. Paying past the due date may subject you to a late fee. Coupled with interest rates, it could make your total amount due go over your budget.
2. Consolidate Your Debts
If you’re having trouble paying off your debts, you can consolidate them. Debt consolidation allows you to transfer your debts to another lender, whom you should repay in turn. It has a lower interest rate, which will help you reduce your monthly expenses. It will extend the period of your loan, though, but at least your debts—including your mortgage, car loan, student loan, etc.—can now be taken care of.
3. Ignore Any Saving Rule
For now, ignore any money-saving rule, like keeping half of your salary every month or stashing 10% of it into your savings account. Since your low income can put you in a precarious position anytime, focus on saving what you can. Feel free to stash whatever percentage of it into your savings account or emergency savings if you get a windfall. Of course, you should consider using it to pay off your mortgage and bills, too. That way, you can enjoy your windfall wholly because you’ve already settled your obligations.
4. Apply for Government Financial Aids
The UK Government offers aid to eligible low-income individuals and families. In Scotland, for example, you may qualify for Universal Credit. It can help with your living costs through monthly or bi-monthly payments. Universal Credit replaced Housing Benefit, a program that helped low-income earners and unemployed people pay rent.
If you’re not eligible for some benefits because you’re employed, working more hours, or earning more money, you may qualify for Mortgage Interest Run On. It gives you extra money to use for your housing costs.
Support for Mortgage Interest (SMI) is another helpful program. It can finance your interest payments or any home repairs and improvements.
Browse the GOV. UK website to see which benefits you can be eligible for. Don’t miss out on the opportunity to receive aid because it will take a load off your shoulders.
5. Make One Extra Mortgage Payment Each Year
If you see yourself earning more money in the future, consider making one extra mortgage payment next year and then every year, moving forward. This will help you pay off your loan principal earlier. Your 30-year mortgage can be settled in just 15 because of this method.
However, early payments don’t always result in greater savings. For example, making one extra payment for a £200,000 mortgage at 2.75% interest would only save you about £12,000. And it would shorten your mortgage to just three years. Hence, consider these implications before making extra payments. If you want to take advantage of a windfall, do it, but don’t pressure yourself to accomplish an early payment.
6. Adjust Spending as Needed
Lastly, since reducing expenses isn’t always an option given your situation, adjust your spending instead. For instance, consider changing your phone plan if you’re paying phone bills on top of cable TV and internet. Maybe a cheaper one will benefit you the same way your pricier plan does. Identify which bills will keep benefiting you even if you subscribe to a more affordable plan. It can reduce your monthly spending significantly.
Remember these hacks as you buy and live in your home. But don’t be hard on yourself; the fact that you’ve purchased a home instead of renting one is a remarkable accomplishment. Just know your priorities, and everything will fall into place.