Mortgages are one of the most common forms of debt in the UK. In fact, only credit cards rank above mortgages when it comes to the proportion of the national population with each type of debt – 35% and 24% respectively.
t’s a huge market, and for most people a mortgage will be the largest single debt they take on in their life. It is vital, therefore, that consumers are thorough and diligent in both finding the right mortgage product and making mortgage repayments.
Navigating the mortgage market
Returning to the aforementioned research by KnowYourMoney.co.uk, not only did the survey uncover the types of debt people have, but it also offered insight into the ways Britons are managing their finances. And there were some concerning findings.
Most notably, two thirds (67%) of those in debt have no savings stored away to enable them to pay off debt if required, with men (73%) more likely than women (62%) to lack a financial safety net. Furthermore, nearly three in ten (29%) said they do not feel in control of their debt and have no plans of how they will pay it off.
In light of these figures, it is perhaps less surprising to note that 24% of people in debt said they lose sleep because of it.
When it comes to mortgages, planning and preparation are key. Indeed, with so many mortgages available – 4,214 new products were introduced into the residential mortgage market between 2016 and 2018 alone – choosing the most appropriate option can be challenging.
Importantly, this challenge starts with an individual understanding his or her personal finances.
Debt-to-income ratios
Essential within this planning phase is to know one’s debt-to-income (DTI) ratio. In short, this offers an indication of how much debt a person has in relation to their earnings – it is calculated by dividing total recurring monthly debt by gross monthly income.
But many people are in the dark about DTI ratios; 44% of UK adults do not know what their debt-to-income ratio is, with 39% admitting to not understanding the term.
This needs to be addressed. Without understanding exactly how much debt one can responsibly handle, securing the right mortgage is extremely difficult.
Of course, a mortgage provider will undertake its own due diligence in ensuring a borrower’s income is sufficient for the terms of a particular mortgage. However, in truth, the lender will never be able to match the borrower’s granular insight into their finances.
Avoiding bad debt
Ultimately, despite the negative connotations that still surround the word, debt is an extremely valuable financial instrument. It enables people to pursue life goals otherwise out-of-reach. But we must recognise there are good debts and bad debts.
Good debts are both manageable and will provide value to the individual – mortgages are a prime example of this, assuming the amount borrowed can be repaid. Bad debts are those that cannot realistically be repaid or provide no value – taking on debt to pay-off other debt is a common example of this.
Mortgages, by and large, are good debts, but only when the monthly repayments can be made without being overly restrictive to a person’s financial situation. The first step is for consumers to ensure they know what their DTI ratio is – a task that takes just a few moments thanks to online DTI calculators.
Failure to do so could cause problems down the line. Illustrating this point, it is estimated around 88,000 mortgages in the UK are in arrears of 2.5% or more, while there are 52 mortgage possession claims made every day.
To avoid falling into this situation, borrowers must be sure they only take on good debt. Moreover, whenever possible they should set aside savings to help make repayments in case of cash flow issues or interest rate changes in the future.
Thorough preparation and careful management are at the heart of any successful financial strategy, and when it comes to mortgages these are essential in ensuring people navigate the market safely and only accrue debts in a safe, responsible manner.
