With buyers competing so fiercely for properties, you really need to know your limits and stick to them. Fortunately, this is easily calculated.
First, take your monthly household pre-tax income and divide it by three. This is the maximum amount that your repayments must constitute from your income each month. Having to pay more than a third for housing is considered “mortgage stress”.
But beyond that, you have to perform another “stress test”: could you cope if interest rates went up 1% or 2%?
While the mortgage rate hike still looks like a year or two away, it will happen – and you’ll likely have the loan for 25 or 30 years.
Once you’ve calculated your secure repayment limit, jump to any online mortgage repayment calculator to determine what loan size you would afford today at a competitive 2% interest rate. Remember to make sure that you will be comfortable with the higher repayments if it were to hit 4 percent.
Naturally, you add your deposit to that (actually in this market 10% might be about right) to get your total budget. You’ll also need cash for other fees, such as stamp duty, loan fees, and settlement.
Once you know how much to spend, now you need to make a wise purchase choice.
Market research is essential. Visit one of the real estate listing websites to get an overview of the outlook and prices in an area you are considering. The old adage “buy the worst house on the best street” still holds true.
However, your plan for the future is crucial for what you decide to buy.
Ideally, you want to keep a property for seven years or more, as the entry fees are steep.
It is especially important whether or not you have children. This may change the secure borrowing limit calculation above; could you switch to one income and still make the mortgage payments?
You need a good quality loan, not a cheap and cheerful loan. By quality I mean an account that comes with a mortgage clearing account from an authorized depository institution. That way your money is quarantined from any kind of bank recalculation of what you owe – and subsequent raid on any loan overpayments. It’s already arrived !
The other pitfall to be aware of is honeymoon offers, or cashbacks, which are used to attract new customers. With either, your financial advantage is likely to erode after just two years of a higher interest rate.
You can get a quality mortgage with variable rate, principal and interest for as low as 1.89%. Search it on Google.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions regarding investments or financial products. They should always seek their own professional advice that takes their personal circumstances into account before making financial decisions.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.