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Buying your first property (Part 3) – How much can I afford to pay back every month

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Buying your first property (Part 3) – How much can I afford to pay back every month

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Previous: Buying your first property (Part 2) – Why save for a deposit for your property?

You need money to buy a property

The name of the game is money – and borrowing is no exception. Affordability should not worry you, and there are a few quick ways to determine if you can afford a home loan.

It is vital that you remember that no bank will lend you money if you have no money. The bank wants to know you have a stable income and will be able to repay the loan – the bank needs to know that you would be able to afford it. 

When talking about your money and a home loan, there are normally two things that you need to be aware of: affordability and repayments.

The first, affordability, is all about how much you can borrow from the bank. Repayments on the other hand is how much you will need to pay back to the bank.   

Affordability

Affordability calculations are used to determine how much money you can borrow from the bank. This gives you an indication of how much money you can spend on a house.

Under the hood calculations

They normally first start off with a basic affordability calculation. This entails checking your disposable income. This, in turn, will be used as the amount that you can repay every month. It will then calculate the full amount that you can borrow. This is, taking your (gross) income minus all your expenses.

Repayments

Repayments have to do with your monthly payment to the bank.

Concerning this, be very careful that you do not overextend yourself. You are going to have to repay every month’s a portion of the money that you owe the bank! 

Under the hood calculations

When you apply for a home loan, the bank will put your money matters under a stress test. Some scenarios that will be explored, include:

  • What would happen if interest rates would rise? Will you still be able to pay back the money?
  • What would happen if you lost rental income?

Legal and technicalities – blah blah blah

There are also legal technicalities on affordability and repayments that you need to be aware of – the NCR enforces certain laws on borrowing money.

You can only pay 30 % of gross income towards property loans. This would mean that if you earn R 10 000 a month, you can repay R 3 000 per month for your property.

Here’s the kicker: If you have an existing bond on a property (that you will not settle to buy the new one), with a bond repayment of R 1 000 per month, you only have R 2 000 per month to spend on another property.

To explain this better, let’s look at some scenarios

Scenario #1

You earn R 10 000 per month (gross).

You have no debt.

Your living expenses total R 4 000 per month.

You have disposable income of R 6 000 per month.

You can spend up to R 3 000 per month on a homeloan.

Scenario #2

You earn R 10 000 per month (gross).

You pay R 4 000 per month on credit card debt.

Your living expenses total R 4 000 per month.

You have disposable income of R 2 000 per month.

You can spend up to R 2 000 per month on a homeloan.

Scenario #3

You earn R 10 000 per month (gross).

You have no debt.

You have an existing home loan of R 1 000 per month.

Your living expenses total R 4 000 per month.

You have disposable income of R 5 000 per month.

You can spend up to R 2 000 per month on a homeloan (due to the 30 % rule).

Conclusion

Once you know how much you you can afford to repay to the bank, you’re able to combine this with a credit check. This will give you your credit expenses for you to get a better picture about what your finances are really looking like.

Never lie about your expenses – the bank knows things.

Always remember the 30 % rule – A bank or financial institution cannot lend you more than 30% of your gross income for repayments every month. In all technicality, you could borrow 30 % from one bank and 30 % from another, if you have the cash flow available.

I don’t suggest spreading your risk too thin though – this might cause much more harm than good!

If you are planning on leveraging property, check out my article on emergency funds here – you will need a huge emergency fund for safety!

Go now!

Happy investing.

Helpful resources

I like using the BetterBond calculator, but that’s just me. You can use the ones from Ooba or another site if you like.

Article reposted with permission from Frugal Local. Original post here.

Next: Buying your first property (Part 4) – Pre-qualification certificates

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Carl Barnard

Hey, I am frugal... I love talking about property and money. Some interesting facts about me: I drink too much coffee. I have walked the Camino de Santiago twice. I have the most awesome wife. I am a software developer by day.

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