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Regardless of how much you earn or which type of house you are looking for, the first question that is likely to come into your mind while property shopping is “How much can you afford?”
And the answer to this question depends on numerous factors including savings, income, personal favourites, your location, and, most importantly, the buying plan.
It is always favourable to seek financial advice from an expert before taking mortgage finance, or planning to buy a house.
It helps to visualise what you want to achieve and get assistance in setting the strategies accordingly. It also saves time.
Buying a property is one of the biggest personal expenses a person can have and one of the most important decisions a person can make; hence, prior to taking an enormous debt, take time to do some basic calculations.
People who are looking to buy a house can generally afford to have a mortgage that costs between two and two and a half times of their gross income.
And the minimum deposit you will be making will be 25 per cent of the value of the property.
So, if you apprehend this ratio to plan your financial approaches, considering your personal preferences, and your present and future lifestyle, then probably you can make an informed decision.
Now, considering the lenders’ perspective, they use formulas that are complex and thorough to gain a precise idea of what size of mortgage their clients can handle.
They consider two factors, front-end and back-end ratios, which contribute to making a decision.
The front-end ratio calculates the yearly gross income devoted towards making the monthly payments, which consist of three components: principal, interest and insurance. The rule of thumb is that it should not exceed 30 to 35 per cent of the gross income.
The back-end ratio, referred to as the debt-to-income ratio, calculates the gross income percentage which covers your debts including mortgage, credit cards, child support and other loan payments including how much cash you will be able to accumulate for a down payment.
However, as per the UAE Central Bank law, a lender calculates the loan eligibility by taking 50 per cent of the total monthly income.
Buying a house is an exciting venture; nonetheless, while shopping for one’s dream property, one should not forget the financial responsibilities of homeownership.
A mortgage is certainly the main cost associated with a home, but then there are added expenses such as maintenance, utilities, furniture, décor and the like which need to be considered.
A smart property shopper would do well if he keeps in mind these costs as well.
Furthermore, before you consider buying a home, the rule of thumb is for you to have at least four to six-month worth of expenses (including EMI) in savings account, or in a money market instrument.
For prudent financial planning, you should invest in such a manner that your investment corpus fund value can match at least half the outstanding principal so that in the rainy days, this corpus can be used to redeem part of the mortgage’s outstanding amount.
Therefore, if you are thinking of buying a property, have a good credit score and feel secure about your employment, sit down with a mortgage expert and discuss the situation based on your income.
The expert can guide you and offer you the best advice on the different mortgage products available in the market.
Source: Dhiren Gupta, Managing Director, 4C Mortgage Consultancy