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How much should your mortgage be in relation to your salary?

By Edited Oct 2, 2015 0 0

Mortgage(46114)
Buying a house or an apartment is the largest financial decision an average family or person has to makein their lifetime (purchase of a car is the 2nd one). This is the reason why it is of utmost importance both to you and the banks who give out mortgages to clearly understand your current financial circumstances.

This is purely a need in order to reduce the risks. For you this is important because if you get into too much debt it may be very difficult to get out and you could remain trapped for many years or even for a lifetime. For the banks this is important because they want to make a profit for a long time. They are not interested to make a huge profit in the short run but destroy you in the process. They prefer to keep making money off you for your entire life.

This is why they analyse your situation and approve or reject your mortgage application. So an important piece of information anyone considering a house or an apartment wants to know is how much should the mortgage amount be in relation to one’s salary, both, in order to get approved and to still be able to enjoy a decent life.

Banks, brokers, other institutions use ratios which are derived from their experience and economics in order to make these decisions. The housing expense ratio, known also as a front ratio, compares your monthly income to your total mortgage amount. Depending on your area and the institution you are discussing with, your total mortgage payment is expected to be no more than 30% to 40% of your total salary.

Bear in mind that the total mortgage payment does not include only the amount for the house or the apartment you are purchasing, but also can include other factors such as various insurances (fire, theft, etc) which the bank may agree with you to include. Very often the banks will try to sell you these insurances together with the mortgage. They make more money by doing this but also they try to offer you a better price as they can sell you the entire package. You should, of course, check with several banks in order to improve your negotiation strength.

Some banks also have online calculators on their websites. These can give you a guideline amount, but it is important to remember, and it is often written in the small print, that these amounts are just guidelines and the bank is not bound by them. They do however assist you in getting the rough idea prior to your discussion with the agent or consultant at the bank.

There are also other factors which will influence the decision of the bank. The most important one of them is if you have already other debt either with that bank or another. Naturally, if you already have another mortgage or some other type of debt, this will affect your available monthly capital and therefore the bank may put higher demands on your salary.

You also have some ways to influence this decision yourself. If you opt for a longer term mortgage of for example 30 years instead of 20 years, then this would reduce your monthly payment amount and therefore make it easier to get approved with a smaller salary. There are also variable and fixed interest rates and other schemes which banks may offer you so it is important to take a look at all the different options available in order to make the best decision for you.

Naturally, if you have the money, you can also reduce the risk by paying a certain amount of the capital yourself. This would of course reduce the total debt amount, which results in a smaller monthly mortgage payment leading to an easier approval.

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