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Mortgages - How Much Can I Borrow?

By Sandy Naidu | May 29, 2008

Unless you have been living in a cave or in some remote desert, you would have heard of the global credit crisis. It is also called the sub-prime crisis. Sub-Prime lenders lend to people who do not qualify for a prime loan (or a mainstream loan)…One of the primary reasons they don’t qualify for a mainstream loan is because they want to borrow more than they can afford…The risk of these borrowers defaulting is also very high…And hence the interest rates and fees for sub-prime loans is higher than the mainstream loans. A lot of these borrowers have defaulted on their loans and this is what has led to this crisis. So I guess if there is one important lesson every individual can learn from this crisis is - “Don’t Borrow More Than You Can Afford.”



So How Much Should You Borrow?



1. Make a list of all your monthly expenses…Or better still monitor your outflows over a period of two to three months…This gives you a better indicator of what your expenses are.

2. The difference between your expenses and your net income is what you can afford as monthly repayments. So the total amount you can borrow can be worked out from what monthly repayment you can afford.

A few other things can have an impact on your figures are:

1. Moving From Double Income To Single Income (for couples)
2. Holidays
3. Change In Economy
4. Children’s Education
5. Plus May Be Some Unforeseen Expenses…

The best way to tackle these unforeseen expenses is to have buffer. Add a buffer to your monthly expenses and then borrow…How much buffer you need to add depends on you…My only suggestion is - be generous…A bigger buffer is better than a small one…If your partner or you plan to quit work in the near future then your buffer has to be quite high.



The Importance Of Trial Runs



Once you arrive at the monthly repayment figure you can afford, do a trial run…For three to four months, as soon as you receive your pay, deposit amount equivalent to your mortgage repayment figure into a separate account and then try to live with the rest of the money…No touching what you have deposited in the separate account…This way you will know if you need extra money or able to lead a reasonably good lifestyle with the left over money…Adjust your mortgage repayment accordingly.



The Final Tick Checklist



Your monthly repayment amount should never be more than one third of your gross salary…A third of your gross salary is for the tax man, a third for your living expenses and a third for your bank (for mortgage)…

cute house
Creative Commons License photo credit: moon angel

The total amount you borrow should not be more than 3.5 times your gross salary…

These two above points are only rough guidelines…The ultimate figure depends entirely on your individual circumstances.

And Here Are Two Golden Rules:

  • Don’t be tempted…There are a lot of lenders who will try to tempt you and say you can afford more…They are obviously not acting in your best interests….Be cautious and run your figures meticulously and only borrow what you can afford to repay.


  • Try to save as much deposit as you can…20% deposit is a good amount…Anything less you end up with other fees…




    • Please be careful before you borrow…You are after all borrowing for your Perfect Home…There is no point being going beyond your means and in the process losing your Perfect Home.

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    Topics: Property |

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