When you're looking to buy a home, knowing how much of your salary should go towards the purchase is important. The amount of money you should spend on your mortgage depends on several factors, including your income, mortgage size and term. Other important expenses such as saving for retirement further add to the importance of answering this question.
This article helps you understand how much of your salary should go on mortgage so you can buy your dream house while keeping your finances balanced.
A mortgage payment is the instalment payment you make to a mortgage lender for facilitating a mortgage loan to help you acquire property. Such instalments are usually monthly, to keep them affordable and ensure consistency in the repayment.
find me a mortgageA mortgage payment comprises four factors:
A percentage of each mortgage instalment payment goes towards settling the principal balance. Typically, the initial principal repayment percentage starts low and then increases over time.
A mortgage lender has to charge you for the risk they incur for giving you a lump sum to buy the property, then wait as you pay back that lump sum in instalments. The higher the interest rate, the larger the instalment payments, no matter the principal amount.
The government charges taxes to fund its activities, such as providing schools, emergency services like the fire department, and other social amenities that make life on your property comfortable and safe. Real estate taxes are calculated on a per annum basis, but you may pay that sum as instalments every month. The mortgage lender collects your instalments and keeps them until it’s time to pay the government.
The insurance portion of the mortgage payments caters for covering the property against incidents and accidents, and for protecting the lender’s investment should you fail to honour the payments.
Before looking at the factors that determine how much a lender will ask from your salary, let us look at factors that’ll motivate your dedication to the apportionment.
When seeking a mortgage, you’ll be asked for a down payment. Each lender has a preferred percentage of the mortgage they expect you to present as down payment. Generally, the bigger the down payment, the less you’ll have to pay as later instalments since the interest charged is based on the principal, which is the mortgage less the down payment.
Your debt-to-income ratio affects the lender’s willingness to approve your mortgage loan application. Therefore, the more disposable income you have, the easier it is for your application to go through.
You may find a property that’s slightly beyond your budget, but is so appealing you’re willing to squeeze a bit more out of your salary to acquire it. Your motivation may be purely for sentimental reasons, or it may be a worthy investment. Therefore, how attractive the property is will significantly influence how much of your salary should go on mortgage.
As a balancing factor, you then need to think of how well you’ll manage those monthly deductions off your salary. Sustainability considers what the deduction will mean for your overall spending, and consistency of payments. You can only accept a deduction if it won’t later introduce financial challenges.
Several factors influence this percentage, from expert recommendations, your financial position, and a lender’s calculations.
The 28% rule: This is common among lenders when determining the monthly deductions, where a mortgage payment deduction is capped at 28% of your gross monthly income.
The 35%/45% rule: Here, your total monthly debt, including mortgage payments, should not exceed 35% of your pre-tax income or 45% of your after-tax income. To apply this rule, calculate both the 35% pre-tax and 45% after-tax figures, then consider an amount within the resultant range.
The 25% post-tax rule: This rule states that your monthly debt should not exceed 25% of your post-tax income. It's the more stringent rule of the three but leaves you with more money to attend to other commitments.
How much of your salary you can dedicate to the mortgage payments comes down to three things:
Your mortgage-to-income ratio: This ratio is also a factor that lenders may consider, but it is of critical importance to you. Remember, the mortgage payment isn’t your only financial obligation. Therefore, you need to keep this ratio as low as possible, to give your payslip space to accommodate other expenses.
Down payment: You’ll have more breathing space in your payslip if you happen to have a large sum set aside for the down payment. The down payment reduces the principal amount used to calculate the monthly instalments.
Maintenance costs: While these may be summarised under other monthly expenses, it is worth considering them independently since they are specific to the property. You’ll have to incur maintenance costs on the property as long as you’re the owner, even beyond completing the mortgage payments. Therefore, find out how much you’ll have to spend on lawn maintenance, the security system, pest control services, etc.
A lender’s main concern is your ability to make timely and consistent instalment payments. The risk involved in facilitating the purchase for you and then collecting the monthly payments to settle their accounts is considerable, which is why most lenders are conservative in their approach. Therefore, they’ll ask for a sizeable down payment, or charge a higher interest where they feel the risk is high. In addition, they’ll be keen on your debt-to-income ratio, and readily approve applications from those who have the least debts but a lot of disposable income with no major future financial obligations.
Your down payment goes a long way in improving your application’s appeal. Start saving early to improve your chances in the future. In addition, your credit score is a critical consideration. Individuals with poor credit scores inspire little confidence in their ability to make timely and consistent repayments. Work on improving your score before approaching a mortgage lender.
How much of your salary should go on mortgage payments depends on several factors, most notably how well you can sustain those payments, and what a mortgage lender’s terms are. Let us help you handle the entire mortgage application process. We are a professional and highly experienced mortgage advisor in Kent, London, Essex, Buckinghamshire, and its environs. Get in touch for free initial advice or use this mortgage affordability calculator to better understand your financial position
Remember, as a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.
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