As a mortgage broker, it is important that I educate my clients on how to budget for their home loans. Income is the most important factor in determining how much you can borrow on your home loan and how much you can afford to buy. In Australia, the best guide is if your loan repayments don’t exceed 30% of your after-tax salary. This means Australian banks will only lend a loan amount in which the monthly repayment will not exceed 30% of your after-tax income.
In other countries, prospective homeowners have a different way of keeping a limit on how much of their monthly income can go to housing expenses. The 28/36 rule is one technique used to stay within a reasonable limit.
In the 28% model, your monthly mortgage payment, including taxes and insurance should not exceed 28% of your monthly gross income. In the 36% model, you can allocate just up to 36% of your monthly income to all your debt, including mortgage and credit card payments.
With these three models, think about how much income you bring in every month, as well as your existing debts if you have any. These will give you an idea of how much you can afford to spend on home payments.
Now that you’ve made a calculation of the percentage of your income you can set aside for your home loan, you can start exploring the kind of homes you can buy.
Home prices vary based on factors like floor area, lot size, and location. Prices will also depend on whether you’re buying a house that’s ready for occupancy or one that’s in the pre-selling stage. Houses are also turned over to the owner in different ways: they could be complete (with tiles, room partition, etc.) or bare (no tiles, no room partition, etc.), and that’s going to affect the prices as well. You can also explore buying land and building a house or buying a house as a second-hand buyer in an area or location that you desire.
You can go about this in two ways: you can either buy a house that you can afford given your current monthly income, or you can increase your monthly income to buy the house that you really want, according to the US bank JPMorgan Chase.
Payment terms
There are three main types of payments in a home purchase: the reservation fee, the downpayment/equity, and the monthly amortization/mortgage payments. Altogether, these make the total contract price of a property. There could be other fees, so be sure to check with your agent or broker about those.
- Reservation Fee
The reservation fee is a relatively smaller amount you pay to secure a property you’re eyeing so that it will not be sold to someone else.
- Downpayment
The downpayment or equity is often 10%-20% of the total contract price. Depending on your property developer or real estate company, you can pay the downpayment in one go or over a period of 12 to 18 months.
- Monthly Amortization
Unless you’re able to pay the remaining 80-90% of the total contract price in cash, you’re going to have to borrow money to fund your purchase. You can take out a home loan from Pag-IBIG, a bank, or even a property developer. You will repay that debt, plus interest, through your monthly amortization, which could last five to 30 years, depending on the lender.
Case Study:
A first home buyer in her mid-20s recently purchased at the pre-selling stage a house and lot for P3 million pesos. She paid the reservation fee of P15,000 to take the property off the market. After providing the reservation fee, there’s a 10% downpayment payable within 18 months. In her case, it’s P17,000 per month. She is currently in the process of completing the downpayment and every payment she makes chips away at the total contract price.
She is expected to complete the 10% downpayment in early 2023. She will be applying for a 20-year home loan in January 2023. Her goal is to pay out the home loan in 10 to 15 years.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, and self-employed loans. If you have questions, you can email Maria at mpapa@maverickfinance.com.au.
Disclaimer: Your full financial situation will need to be reviewed prior to acceptance of any offer or product.
