How do I know how much I can borrow from a mortgage?
The question here is not how much money you could borrow, but how much you could repay. Affordability is not just about how much money you think you can afford, but how much money the mortgage lender thinks you can afford.
Affordability can be very subjective, what one person feels is affordable, another may not. This, in turn, can present a problem for lenders in how they assess one person’s ability to pay a mortgage versus another’s ability to pay the same loan.
The only way for mortgage lenders to fix this problem is to change their own affordability system. This is not as daunting as it may seem at first glance because each mortgage lender can have their own criteria and with that in mind, it is worth looking at what individual mortgage lenders offer and what suits you best.
As an example, let’s say a mortgage lender stipulates that you can borrow 3 times your annual salary minus other loans that you have increased. To break this down, just take an annual income of 20,000 with other monthly loans of 300. So your annual loan is 12 times 300 or 3600. Subtract this from your annual salary and the figure is 16,400. Then multiply this by 3 to determine what the mortgage lender is willing to loan you, a figure of 49,200.
Don’t worry if your income is the same or less, as all lenders are very different. Three times your income is a very conservative estimate today. Most lenders will loan 4 times the amount or more and some will go for more than 5 depending on your criteria and your circumstances. In some cases, the lender will ignore current expenses, such as car loans and credit cards, unlike the previous case, so it is worth taking the time and attention to search for the lender with the criteria that best suit you. your individual circumstances. Shopping around.
There is another way that some mortgage lenders will assess how much money they are willing to lend you based on entirely different criteria. What they do is decide what percentage of their annual income will go to loans. For example, let’s say you decide that 40% of the 20,000 proceeds will go to loans. That works out to 8,000 for an income of 20,000. They then deduct any other loans from this, such as a car loan that costs $ 300 a month or $ 3,600 a year. This leaves a figure of 4,400 per year or 367 per month that they estimate that you can afford to pay each month.
While no one can really say how much a person can afford, these types of calculations are made to ensure that a certain degree of responsible borrowing is being made. All lenders have to prove to their regulators that they are not irresponsibly slowing down money.
These regulations are there for your benefit too. You want to have a mortgage that you can comfortably pay, not just now, but for years to come. What you can forget when starting a mortgage is that the economic climate changes, interest rates fluctuate, and your mortgage payments can change with it. For that reason, you need to be able to pay your mortgage now, because if you can’t, how can you expect to be able to pay it in the future?
So when you get a mortgage, it is always advisable to check your own affordability and make sure that any mortgage you arrange now is also affordable after some percentage point increases occur. So if they haven’t already, ask your mortgage advisor to quote you the same mortgage with a three percent rate increase and see how affordable it is, if you find it still affordable then you should be sure to keep going.
