When planning to buy a house which is one of the most expensive investments everyone can do, there are many things that you should consider so you could check if you can afford to pay the house’s mortgage.
One of the things that you should consider is whether your monthly income is enough to pay the monthly repayment and how about your daily needs, can you still keep up with all the necessities, bills and debts you are paying every month?
With this in question, you should make sure that you can plan everything before applying for a mortgage loan. Here are some ideas where you can determine whether you can afford a mortgage loan or how much are you going to allow for your mortgage loan repayment.
1. Different Concepts and Numbers
Before you apply for a mortgage loan, you are curious and wanted to know how much you are going to repay the moneylender every month. The amount of your mortgage loan depends on the lender, and there is also a limit on how much you can allow for your monthly income into your loans which is known as the debt-to-income ratio or simply the DTI.
Through DTI, you can only use a maximum of 25% on your monthly salary to repay your mortgage loan and with this; you can now determine whether you can survive the month when the 25% of your salary will be taken out to pay the mortgage loan.
You have to take note as well that it doesn’t mean that because you can afford the DTI ratio, the lender can now give you a loan approval; it will still depend on the lender especially that they have their limit on mortgage loan repayment terms.
2. No Hard and Fast Rules
Although there is already a ‘rule’ in Singapore regarding the percentage a borrower can only spend on a mortgage loan, there are also some other licensed moneylenders and banks that have their own ‘rule,’ and it is up to you if you will grab their offer.
Some lenders’ offer is 30% of your monthly gross income will be paid to them for your loan which many borrowers see as an advantage because they can repay their loan faster thus avoiding being charged with such high interest rate.
There are also other borrowers who are not in favor of this especially those who have large monthly expenses or are still paying other loans. So it is best if you are going to check every licensed moneylender and bank in your area and compare which one best suit your monthly budget for the loan.
Monthly Payment Percentage
After knowing the two possibilities on how much you are going to repay your mortgage loan every month, we are now going to talk about the two kinds of DTI ratios which licensed money lenders and banks in Singapore use.
● Back-end DTI Ratio
The back-end DTI ratio is when the lender will compute all of your debts which include your expenses and other loans aside from the mortgage loan and compare it with your monthly income to come up with the ratio.
Through this kind of DTI ratio, they can check what percentage of your monthly income will be spent on your monthly expenses and loans such as your car loan, education loan, credit card debts, daily needs, etc. and determine whether you can afford another loan which is the mortgage loan.
● Front-end DTI Ratio
The front-end DTI ratio, on the other hand, is only about your mortgage loan and monthly income. In this kind of DTI ratio, your other expenses and loans won’t be included in the computation thus just focusing on your mortgage loan alone.
When using a front-end DTI ratio, the lender usually caps 28% to 30% of your monthly income to the loan repayment which is the maximum percentage of a borrower’s monthly income that could go into a mortgage loan repayment.
There are also some lenders who would exceed this percentage range especially if the borrower can afford the repayment terms, but if we would go for the standard DTI ratio, a percentage of 28% is already a good deal.
How much can you afford?
Affordability and approval are indeed two different things that we should consider when it comes to mortgage loan repayment because there are others who are having a hard time budgeting things when 28% of their salary will be put to their mortgage loan.
With this, you have to see first if you can really afford this DTI ratio and if not, there are still a lot of moneylenders and banks in Singapore that offers various repayment terms. Aside from the repayment terms, they also vary when it comes to the interest rate thus it is vital that you have made moneylenders and banks canvass first so that you can compare them with one another and choose which one is the best for you and your needs.