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Afford a Home Loan Mortgage


Assessing Whether Or Not You Can Afford A Home Loan Mortgage

If not the most important, one of the most important aspects we need to consider before buying a new home is whether or not we can actually afford to repay the home loan mortgage. Here, many of us may do the math and realize that, while it may be tight, we can just about afford to make the monthly repayments to the bank. Once we apply for the home loan, however, we find out there we were nowhere near to qualifying for a home loan mortgage of such a high amount. So how do the banks assess whether or not we can afford a home loan mortgage?

The Multiplier

Historically the multiplier was always the way that banks determined if we earned enough to be able to afford to repay the home loan we had just applied for. Basically this system would work so that you were allowed to borrow as much as two and a half to three times what you annual salary was. Obviously, the amount that you put down on deposit would be deducted from the value of the purchase price, but, previously, it would not have had much of an influence on how much you could borrow if the value of the loan exceeded the multiplier of your salary.

However, with spiraling house prices over the last two decades, and with salaries remaining fairly stagnant over the same period of time, it wasn't long before borrowers simply couldn't keep up with the multiplier calculation if they wanted to purchase anything larger than a greenhouse!

The property value
The property value calculation works on a very simple premise – how much you are willing to put down as a deposit on your new property purchase. If you were only willing to put down a deposit of, say, 10 – 15% of the property purchase, then it was unlikely that this system would help you. However, if you were willing to put down a down-payment deposit of 30 – 40% of property value, then it is highly likely that the bank would lend you the remainder, regardless of whether or not you meet the multiplier test above.

The banks' rationale for letting you have a home loan, even if you could not afford it, if you were willing to put down a substantial down-payment deposit was on the thinking that the property could not devalue by as much 30 – 40% and so if you defaulted on the home loan and the bank needed to sell the reposed property, it is highly likely they would get their money back. Unfortunately, however, there are still a number of banks who have properties in their portfolios because of this thinking, as rising foreclosures resulted in no one wanting to buy property regardless of how cheap the purchase was, and so this type of home loan mortgage is rarely agreed to any longer – although you do see it when the borrower is willing to provide additional security, such as stock, that further indemnify them from any potential loss.

The affordability test
Growing more and more popular among banks lending home loans is the new “affordability” home loan test. The affordable home loan test will evaluate whether or not you can afford your home loan repayment by taking into consideration all of your other expenses. Once this has been ascertained the bank will then be in a position to decide whether your remaining income is sufficient enough for you to be able to buy the new property, regardless of what the multiplier tells it. Using the affordability test home loan calculation method, borrowers can sometimes borrow as much as 50% of their disposable income once all expenses and deductions have been made.

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