When you are searching for the perfect mortgage, one of the questions that will often arise is how much you need to take as the loan. How much do you need to take, and how do you decide what this level will be? Let’s take a closer look at how you can determine this!
The Anatomy of a Mortgage
A mortgage can be broken down into three parts – your deposit, the loan, and the interest. The deposit is the part that you need to save up and have ready for when you purchase the property. The loan will be given to you by the lender, and this will make up the remainder of the cost of the home. The interest is then the added cost that is generated by the outstanding loan. You will have to pay this as you also pay off the loan. The longer you take to pay the loan, the more interest will be generated.
Understanding each part of the mortgage is very important. This could be one of the biggest financial commitments that you have to make, and so you have to make sure that you have a good understanding of what is needed from you as a borrower. With a little more of an insight into the role the loan plays in your total mortgage, let’s look at what can affect the size of your loan.
The Cost of the Property You Buy
Obviously, the type and cost of property that you buy will have some sort of effect on the loan you take. If you opt for a more expensive property, like a penthouse apartment in an upscale neighbourhood, this is going to cost more. Therefore, you are going to need a much bigger loan than you would need if, for example, you were to buy a property somewhere more affordable.
Other properties can be subsidised in different ways too. If you were to buy one of these, there might be grants and other discounts that could make them a more affordable option for you. You might want to look at a loan calculator HDB properties use, as this could tell you what you can afford for this type of property. Never be afraid to look into the types of help you could get if you were to purchase from a certain type of building program – it could be a great way to make a property you love that little bit more affordable.
The Size of Deposit
You might have already decided on what type of property that you wish to buy. This will give you a rough indication of how much it costs, so you know how much you will be spending on the property overall, minus whatever interest is generated. However, there could be a way here to take out a smaller loan than you might expect – and that is by paying a larger deposit.
Mortgage deposits usually come in at around 10% of the value of the property. If you are able to pay more than that, you won’t have to take out as large a loan to cover the rest of the property’s cost. You could manage to pay 20 or even 30% of the cost!
The Repayments
One thing to pay close attention to when choosing the size of your loan is what the repayments will be. A repayment will be made up of the amount that you have left on the loan, plus a portion of the interest generated. You need to make sure that this amount does not exceed what you are able to comfortably pay each month so keeping an eye on your interest rates will be very important.
If you do decide to pay a larger deposit, you might find that you are then able to get lower repayments. Some people might want to pay a higher level as it means that the home will be paid off sooner, but others would rather take a typical repayment window and instead opt for the smaller costs. Remember, a good mortgage is typically lower than what you might pay in rent! Make sure that you find a property that needs a loan that will allow you to take advantage of this fact!
Since the loan is the largest part of your mortgage, you need to make sure that you know what you are getting in for when you apply for one. You need to determine what is feasible for you to pay, and what your repayments might be. Never be afraid to ask a mortgage advisor for more advice about the ratio that might be right for you. Make sure you research any mortgage thoroughly before you think about signing on the dotted line.