Before committing to a mortgage, there are a number of things you need to consider regarding your income and expenditure, and how these might change. The importance of ensuring you can afford a mortgage prior to signing up cannot be overstated.

A mortgage is a very serious obligation. You are committing to making monthly repayments continuously for 25 years or more, and if you fail to do so, your home can be re-possessed by the lender. This means that the answer to ‘What size of mortgage should I take out?’ must be that you should only agree to a deal where you are totally confident you will be able to meet the repayments.

Your lender must also satisfy itself of your ability to meet the payments. Many lenders operate a formula based on your income and any existing commitments to determine how much they may be prepared to lend.

If you have never done a household budget plan, you should certainly do this before you take out a mortgage. A search of the internet will produce several online budget planning tools, which should help you identify how much disposable income you have left each month. Unfortunately, it is not as simple as being able to take out any mortgage deal that has monthly payments less than your disposable income figure.

Consider possible changes in income and expenditure

Firstly, you should always think about any planned events that may affect your income and/or expenditure, for example are you planning to have children, and how might this affect your circumstances?

Secondly, you should consider whether you could afford the mortgage if interest rates rose. Before you are asked to sign a mortgage application form you should be given a document known as a Key Features Illustration. On your illustration you should look carefully not only at section 6, which explains the payments required at current interest rates, but also at section 7, which states by how much your payments would rise with a 1% increase in the interest rate, known in the mortgage industry as the payment shock.

Thirdly, while in years gone by you may have been able to assume that income and expenditure amounts might increase by roughly the same percentage, in the current climate this may not be so. Remember that wage increases are often well below inflation, and that the cost of utilities and transport is rising dramatically. The combination of these factors will erode disposable incomes further for many and affect the amounts available for mortgage repayments.

Finally, consider the likely monthly costs of any insurance premiums. A lender will insist that buildings insurance is in force on a mortgaged property, and life insurance and critical illness insurance on the mortgage balance are certainly highly desirable.

On a more positive note, whilst potential first-time buyers are experiencing certain difficulties in getting on the housing ladder, they may actually find their mortgage repayments are lower than their previous rent payments. Rents are rising dramatically as demand for rental properties increases, while mortgage interest rates remain very low as of December 2011.

Look for payment flexibility in a mortgage

Given the current economic climate, it could be well worth your while seeking out a flexible mortgage. Look out for deals that allow overpayments and/or payment holidays, so that you can vary your monthly repayments for short periods based on your financial situation. Also consider offset mortgages, where you can place any spare money each month into a savings account which is linked to your mortgage, and see your mortgage payments fall according to the balance of the savings account.

What if I can’t afford a mortgage?

If after a detailed analysis of what you can afford, your conclusion is that you cannot commit to a standard mortgage, your best options are either to save as much as possible so you accumulate a larger deposit, or to examine other types of mortgage such as shared ownership and shared equity.

This content was produced by Pamela Chimbonda of Fiscal Muses on behalf of Ulster Bank, who are now offering first time buyer mortgages.