Regardless of whether the desire is to purchase property valued at $200,000 or $2 million, there are some basic questions that arise in the mind of the prospective home owner. For example, How much can I borrow? What will my monthly payments be like? What are the closing charges like?
As a general rule, most mortgage companies provide financing for up to 90% of the lower of the purchase price or value of the property. The amount that you can borrow, that is the principal sum, is determined by a combination of factors:
- Your Income
- Your Age
- Level of Debt
- Interest Rate
- Principal Sum
Income, Age & Debt
The amount that will be loaned to you is primarily determined by the maximum mortgage instalment for which you are eligible. Generally, the mortgage instalment must not exceed one third of your gross monthly income. You can roughly ascertain the maximum mortgage instalment that you would be able to pay, by simply dividing your total gross monthly income by three (3).
The maximum term of your mortgage loan is based on the difference between your present age and the age 60 (or retirement age), up to a maximum of 30 years.
Level of Debt
This is of particular importance, as it can significantly impact the amount that you may borrow. Very simply put, the higher your existing debts, the less you may be able to borrow to purchase your new home.
Your debt service ratio provides an indication of the percentage of your monthly income that is committed to paying loans. As a prospective home owner, it is advisable that your level of debt is kept to a minimum, if not totally eliminated.
The current measurement of the total debt service ratio applicable for residential mortgage financing is 40% of gross monthly income. This means, therefore, that your total loan payments, inclusive of your proposed monthly mortgage installment, must not exceed 40% of your gross monthly income.
Many financial institutions are offering “special packages” on the rate of interest charged on mortgages. It would be instructive, however, for prospective borrowers to ascertain whether these rates remain fixed over the life of the mortgage, or may be subject to change. One can only assess the true cost of borrowing in the context of the terms and conditions accompanying the offer.
For Approved Mortgage Companies, the rate of interest charged on a mortgage loan is determined by the value of the property.
The mortgage or loan amount may be computed by applying a factor based on the term of the loan and the interest rate applicable to the value of the property being purchased, to the maximum mortgage installment for which you qualify (i.e. one third of gross monthly income).
Knowing how much you can borrow provides a useful guide to the value of property that you can purchase. Bear in mind that the mortgage/loan amount would equate to 90% of the property value.
Armed with information regarding what size mortgage you can afford, you will be ready to locate a suitable property to purchase.
Armed with the strong knowledge of borrowing critera, estimate your borrowing amount.