Buying a home is probably the largest single investment you will make in your life. It can be intimidating and overwhelming so here’s a breakdown into less intimidating bites.
1. The earlier you make the decision, the better as it gives you a longer time to repay thus resulting in smaller monthly payments.
Let’s say you are a new graduate. You have just completed your first degree and have started your first job. You’re earning $8,500 a month and living at home with your parents and siblings. You blow your first few paychecks just for the fun of it. But, after a few months, you start thinking that sharing your room is not so much fun and it might be nice to have your own place.
Great ideas begin with begin with a thought.
Check around and see what’s on the market and within your budget.
Most mortgage lenders will lend:
• up to 90 per cent of the lower of cost or valuation of the property
• up to 30 years or retirement whichever comes first
Both at market competitive rates which means that their interest rates will all be close and there may be some room for negotiation depending on the strength of your application with debt service ratios of 30/40 per cent which means that the mortgage payment should not exceed 30 per cent of your salary before tax and total debt service payments (all loans) should not exceed 40 per cent of your before tax salary.
With this in mind, at a salary of $8,500 your monthly mortgage payment should not exceed $2,550 and this will qualify you for a loan of approximately $430,000 over 30 years at 5.75 per cent.
What can you get for $430,000?
If you have land (maybe a gift from your parents) you may be able to build a nice starter home for that amount or alternatively buy land. Some banks offer loans on “interest only” terms with a condition that you start construction of your home within three to five years.
If you buy land in five years it will appreciate in value so you will have earned equity in your property.
You will likely also have an increased income which will allow you to borrow additional funds to build your home.
You’re probably wondering what is the purpose of the debt service ratios?
Simple, these ratios are a guideline that lenders use to ensure that a borrowers’ debt servicing is kept to a level that will allow them to live comfortably after making their loan payments.
Remember to put aside funds for closing charges such as legal fees and stamp duty and, of course, you need money to furnish the house.
2. A home is a long-term investment so think long term when making this decision.
Over the course of your mortgage loan, your salary will increase so the percentage of your income going towards your mortgage will reduce over time. The value of your property is also likely to increase over time which means that you will be able to use this equity to finance future expenses such as university expenses for your children or major medical expenses.
The appreciating value on your home may also enable you to sell it and acquire a larger or more upscale home as your family and career grows.
If you deferred acquiring your home don’t despair, this simply means that you would have moved further along the experience and income scale. You likely know exactly what kind of home you want, have some savings and an income that will allow you to get it so go for it.
Submitted by Sita Mangal, director, Association of Real Estate Agents area.tt.asoc@gmail.com
