When considering purchasing property, several basic questions may arise in the mind of the prospective buyer, whether it is a $2M or $200K purchase being considered. Some of these might include 1). What is the most I can borrow? 2). How much will I pay monthly? 3). What is the interest rate? Although the thought of purchasing a home is viewed with enthusiasm and excitement, the mortgage process can sometimes be an intimidating and stressful task.
Generally, most mortgage companies provide financing for up to 90% of the purchase price or value of the property. The amount that can be borrowed (the principal sum), is determined usually by a combination of factors: Your income; Your age; Your level of debt; The rate of interest being charged; The Principal sum.
The amount that will be loaned to you is for the most part based on the maximum mortgage installment for which you are eligible.
Generally, the mortgage installment must not exceed 33% of your gross family monthly income. So you may determine the maximum mortgage installment that you would be able to pay by simply dividing your total gross monthly income by three.
The surplus liquidity in the local financial market from approx 2001, has caused mortgage interest rates to fall from as high as 13% per annum and settle at a going rate of around 8% per annum (June/July 2005).
For approved mortgage companies, the rate of interest charged on a mortgage loan is determined by the value of the property as shown below:
6.0% – $200K and below
6.5% – $201~$250K
7.0% – $251K~300K
7.5% – $301K~$351K
8.0% – Over $301K
(Prices in TT dollars)
Most mortgages are granted for a period not exceeding 30 years. The maximum term of your mortgage loan is based on the difference between your present age and age 60, up to a maximum of 30 years.
This is of particular importance as it can significantly impact the amount that you may borrow. Basically the higher your existing debts, the less you may be able to borrow to purchase your property.
Your debt service ratio gives an indication of the percentage of your monthly income that is committed to paying loans. For the soon-to-be home owner, it is advisable that your level of debt is kept to a minimum, if not totally eliminated.
The current measurement of the debt service ratio applicable for residential mortgage financing is 40% of gross monthly income. This means therefore, that your total loan payments, inclusive of your proposed monthly mortgage installment, must not exceed 40% of your gross monthly income.
The mortgage or loan amount may be calculated by applying to the maximum mortgage installment for which you qualify (ie, 33% of gross monthly income), a factor which is based on the term of the loan and the interest rate applicable to the value of the property being purchased.
The factors shown below are those for commonly requested repayment terms. The loan amount is derived by dividing the maximum monthly installment payable by the appropriate factor:
TERM / $200K / $250K / $300K / $350K / Over $350K
15 yrs / 0.008439 / 0.008711 / 0.008988 / 0.00927 / 0.009556
20 yrs / 0.007164 / 0.007456 / 0.007753 / 0.008056 / 0.008363
25 yrs / 0.006443 / 0.006752 / 0.007068 / 0.00739 / 0.007718
30 yrs / 0.005996 / 0.006321 / 0.006653 / 0.006992 / 0.007338
Here is an example:
Gross monthly income = $10,000
Maximum installment payable = $3,330 (33.3% of $10k)
Maximum term based on present age = 20 years
Interest rate based on property value = 8%
Maximum principal sum that can be borrowed = $398k ($3,330/0.008368)
(Note: This calculation umes that there are no other current debts)
Knowing how much you can borrow, provides a guide to the value of the property that you should consider, bearing in mind that the mortgage amount would equal 90% of the property value.
Therefore, based on the above example, this buyer can purchase a property costing up to $442,000.