Regardless of how much you earn or which type of house you looking for, the first question likely to come in your mind while shopping- “How much you can afford?” And the answer to this depends on numerous factors including savings, income, personal favorites, your location, and most importantly the buying plan. It’s always favorable to seek financial advice before taking mortgage finance or planning to buy a house, from an expert. It helps to visualise what you want to achieve and assist in setting the strategies accordingly, alongside it saves time.
Buying a property is one of the biggest personal expenses, hence prior taking such an enormous debt, take a time to do some basic calculation.
People who are looking to buy a house can generally afford to mortgage a property that costs between two to two and a half times of their gross income. And the minimum deposit you will be making will be 25% of the value of the property. So, if you apprehend this ratio and plan the financial approaches considering your personal preferences, thinking about the present and future lifestyle, then probably you can make an informed decision.
Now considering 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 ratio which contributes into the decision.
The front-end ratio calculates the yearly gross income devoted towards making the monthly payment, which consist of three components which are principal, interest and insurance. A rule of thumb is that it should not exceed 30- 35 per cent of your gross income.
The back-end ratio referred 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 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 and décor, and the like, which needs to be considered. And a smart shopper would fix well if they keep in mind these costs too.
Furthermore, before you consider buying a home as a thumb rule one should have at least 4-6 months expenses (including EMI) in saving bank account or in a money market instrument. As for a prudent financial planning you should invest in such a manner that your investment corpus fund value can match at least half the outstanding principle so in rainy days this corpus can be used to redeem the part of the mortgage outstanding amount.
Therefore, if 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 they can guide the best advice on mortgage product available in the market.
Also Featured in Khaleej Times, Dubai