Taking a mortgage ? Do Not Change Your Lifestyle Dramatically

   

My observation could be too narrow, but from what I saw, when someone want to take a mortgage, he/she tends to go for the maximum available even exceed it. The argument usually that they can still afford the repayment, so there should be no problem taking that amount of mortgage/homeloan. It seems they forget one golden rule that I always endorse: if you take a mortgage you cannot change your lifestyle dramatically.

Mortgage is Long Term Commitment

The mortgage or homeloan is a contract to repay the debt for long term period, usually 25 years or 30 years. So, any change that you introduce in order to get the mortgage, have to be able to sustain for the duration of the mortgage. For example: if you dine out every weekend with your family, because of the mortgage, maybe you can reduce it to twice a month. But if you plan to have no more dine out just to fulfill your mortgage, you will be in trouble sooner than later.

You Need to Keep On Living, and Living Comfortably

Don't change Lifestyle Dramatically

Taking a mortgage to own your home is a first step toward better future, not the final one. Hence, you need to keep on living and still maintain your (better) living quality.  You need to maintain your quality of your living before and after taking mortgage, for example: if you eat certain brand of food, you need to be able to buy the same brand, not the cheaper with lower quality one. If you usually buy some luxurious item, maybe you can reduce the frequency, but you will still need to be able to buy that luxurious item from time to time.

The Economy Will Change Up and Down

Also, the economy will change as you go. It will go up and down, and so does the interest rate of your mortgage. Unless you are on 30 years fixed interest rate, you need to be able to serve the mortgage at least if the interest rate increase by 1% for practical guide.

For example: If you took $400k mortgage for 30years with 5% interest rate, you will be paying $2,148 monthly. If it were 6%, you will be paying $2,399.  So, it is a good practice that you need to be comfortable should you need to pay that much. At the end of the month if there is no rate increase, then you can spend the money, or better action: pay it to the mortgage as your extra repayment. Every time interest rate actually increases, you then need to re-assess your situation and be prepare to pay further 1% hike. You can use repayment calculator available online to help with the calculation, such this calculator.

The Valuation From The Bank Could Be Lower

Before the bank or any lender give you the final offer for the mortgage, they will need to do the valuation of the property that you will mortgaged. Usually the property you buy and the property that will be mortgaged (put as security of the loan) are the same property. In this case, you need to be ready if the bank give you lower valuation.

For example: with $50,000 deposit, your mortgage broker say you can borrow up to $400,000. (Total value $450,000 with LVR – Loan to Value Ratio – 88% ). Now if the valuation from the bank come up lower, say only $425,000. Then maintaining the same ratio of 88% , the bank will only lend you $374,000. With your deposit of $50k, then total money that you have will be only $424k, or short of 26$k from the selling price of $450k. If you have signed the sale contract, you need to come up with this $26k somehow or negotiate the price with seller (almost impossible as you have signed the contract). So, it’s wise not go for the maximum… give a bit of room just in case the valuation go lower.

Your Situation Could Change

You also need to be prepare if your situation change: newborn baby, job change, salary cut, emergency spending, etc. That’s why you need to achieve the financial protection level, preferably before taking the mortgage. Financial protection is where you have at least 6 months of your living cost on your saving as emergency fund.

What You Need To Do

I would suggest you do this before you finalize your purchase of the property:

1. Calculate your maximum monthly budget for the mortgage without changing your lifestyle dramatically.
2. Reduce this budget for taking a life insurance and/or income protection insurance
3. Use the repayment calculator, simulate if the interest rate is 1% higher than the current interest rate that you have been offered. Get the maximum that you can borrow here.
4. Add no (3) above with the deposit that you want to put. This will be the maximum price of property that you will buy. If you want to buy slightly more expensive property, you just need to add your deposit.

Final Words

Always remember, that taking a mortgage to own your own home is essentially a big step forward toward better future. Yes, to make it happen you might need to do some sacrifices, but that sacrifices cannot be too much different. Otherwise, not only the mortgage become a burden and source of all kind of problem, you will be pressured financially as well if something change. Have youself a bit of buffer, do not push your borrowing capacity and maintain the quality of your living (improve it will be better!).

Hope this helps !

Related Posts

• Offset Account: A Must Have For Your Mortgage
• Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know
• Getting Your First Home Loan or Mortgage: Not That Hard!
• Why You Should Always Use Mortgage Broker For Your Homeloan
• Mortgage: Change To Fixed Rate or Keep It Variable ?

Denis Kristanda  

Leave a comment