Maricor Bunal
Living within one’s means is the foundation of good financial health, and this is no less true when considering to buy a new home.
When purchasing residential property, first-time buyers tend to place a great deal of attention on the down-payment. This is understandable, as the “DP” often amounts to at least a fifth of a property’s total selling price, and is a significant sum to be paid immediately upon purchase. The rest of the home is covered by a mortgage or housing loan, which figures into a buyer’s income via monthly payments.
However, there are also other expenses associated with buying a home. Even if you’ve saved enough for a down-payment and have been approved for a home loan, you must still consider whether your income can accommodate not just monthly mortgage payments, but also expenses such as real property tax, homeowner’s association fees, and repairs and maintenance.
Global property website Lamudi Philippines has put together tips on how to better navigate the financial aspects of homebuying.
28 percent rule
While this is not quite an exact science, real estate pundits recommend following the “28 percent rule,” where you do not spend more than 28 percent of your monthly disposable income on housing (mortgage repayments or rent). Any higher, and it is assumed that you may have some difficulties in coping with the monthly payments and other expenses.
If you were to earn Php35,000 per month, it is advised that you buy a property with a housing loan that allows you to spend no more than Php9,800 on monthly payments. Following this rule, a property costing Php1.5 million, once the 20% down-payment of Php300,000 is paid, leaves you with a loanable amount of Php1.2 million.
Using 5-year fixed rate, and the maximum loan terms of 20 years, a loan with 6.88% annual interest rate (currently one of the lowest among private banks in the Philippines) would yield a monthly mortgage payment of Php9,217, well within Php9,800.
Of course, fixed rates and loan terms can vary, so you’d also have to take into consideration the specifics offered by your chosen lender, and examining the pros and cons of the home loans of all possible lenders is the best way to find which ones are best to apply for.
But what about the other expenses associated with the home?
36 percent rule
Another rule of thumb often suggested by experts to use as a general gauge, which would consider a greater scope of your income, is the “36 percent rule.” This where your total house payments are suggested to not exceed more than 36 percent of your gross monthly income.
Citing the Php35,000 per month salary example previously mentioned, this would mean that Php12,600 is the recommended allocation for debt payments. While the previously mentioned monthly mortgage payment of Php9,217 would be significantly less than the recommended allocation, there is of course your other debt and expenses that you must consider before assuming you can go for a larger mortgage.
These can include but are not limited to the following:
Taxes – Real property, stamp document, transfer, capital gains
Fees – Registration, notarial, loan fee, and broker’s commission
Home expenses – Rent or mortgage, homeowners’ association fees, condo dues, loan and real estate insurance, repairs and maintenance, utilities, etc.
Again, while not an exact science, property and financial professionals tend to recommend homebuyers to follow the 36 percent rule, lest you will become what American businessman, author, and motivational speaker Dave Ramsey coins as “house poor.” House poor is when too much of one’s income goes to house-related payments, leaving little that can be saved or spent on other expenses, such as education, life and health insurance, transportation, and others.
Consider EVERYTHING you spend
When making an estimate of what you can afford when buying a home, you must consider all of your expenses, from things as necessary as utilities and groceries, to those not as much, like mobile app purchases and eating out. As you evaluate your monthly housing expenses, and include everything else you pay for, you’ll realize how cumbersome the process can become.
However, going through the rigors of sifting through receipts and accounting for expense will not only give you a more realistic outlook on where you stand in terms of property purchase, but also give an idea of what expenses you can do without and can help make you readier for a new home.
Just keep in mind to indeed account for every expense, even things like pet maintenance and hair care, and consider items that have documentation to arrive at a realistic budget. This is because most lenders, whether government owned or privately held, often require such documents to determine your capacity to pay a large debt.
Conversely, also be mindful that some banks may approve you for a loan that is larger than what you expect, hence, crunching the numbers and arriving at an estimate of what you can afford can steer you away from the temptation of borrowing too large a property loan.
This article piece is written by a writer from Lamudi.com.ph .
