When you're buying a house, you may think about borrowing as much as possible. Perhaps house prices are so high where you want to buy that you think you will need to borrow the maximum amount available to you. But there are a number of reasons why you should avoid taking the maximum loan possible. Here are some sound reasons not to borrow up to the maximum available when you're buying a house …
1. Interest Rates May Rise
One of the reasons why it's best not to borrow too much when buying a house is that interest rates could very well go up. And if they do, your affordable mortgage payments could very quickly become unaffordable on your income. Borrowing less than you could do gives you room for manoeuvre if interest rates do rise.
2. Job Security
Job security seems to be a thing of the past, sadly. This makes it wise not to borrow up to the maximum when you take a mortgage. You may well be able to afford the payments out of your current salary, but what if you have to take a lower-paying job? Taking on a lower mortgage means that you should be able to cover the payments on a lower salary.
3. Build up Equity
When you get a mortgage, you'll slowly build up equity over time. But if you haven't borrowed the maximum amount, you'll have more equity right from the start. This will mean putting down a larger deposit but this protects you against negative equity (when your loan is greater than the value of your house). Building up equity helps if you want to remortgage at some later stage.
4. Higher Deposit
It may be tempting to put down a lower deposit, even if you have the cash. You may want to fix up your new house, or keep the cash in the bank for other reasons. Certainly, you'll need savings for emergencies. But borrowing less means access to better deals, and also that you have a cushion if the value of your house falls.
5. Paying Extra
If you don't borrow as much as you can, then you have space to manoeuvre. You'll have smaller loan payments that you can comfortably manage. You will be able to pay extra off your mortgage when you can, and thus pay off your mortgage early. This can save thousands in interest.
6. If You Hit Problems
It's wise - some may say essential - to have payment protection in case you lose your job or are too ill to work. But these policies may not kick in straight away. Having a smaller loan will be helpful if you do hit personal or work problems. It can happen to anyone.
7. Learn from Recent History
Remember how the economic crisis began? Many people took on loans they couldn't repay. Learn from this; the banks bear a lot of responsibility, but so do individuals. It's important to only borrow what you can comfortably afford to repay, and to ensure that you have covered yourself in case of job loss etc.
Taking a mortgage is the only way that most people can afford to buy a home. But as the largest financial commitment you're likely to make, it's important to make smart financial decisions. Do you plan for the future, or live for today?