If you are thinking about a mortgage, you’ll need to ask yourself a few very important questions.
First of all, ask yourself how much you can afford. A good estimate of this is to subtract your outstanding debts and monthly costs from your taxable income. An average of about 32% of this leftover income is generally needed to mortgage a property and pay property taxes and utilities.
Remember that you have a certain quality of life that you will want to maintain, so don’t take on too much of a loan so that you have to reduce your life’s luxuries.
After you calculate what you can afford to pay monthly for a mortgage, you also have to think about the cost of a down payment. Most mortgages will require a down payment ranging from 5-25% depending on the type and details of the loan, and you’ll need this money up front and ready for closing your property deal.
Additional Mortgage Costs
Aside from monthly payments and down payment, you also need to consider closing fees, which normally will total an additional 2% of the price of the property. These fees can include:
– Lawyer’s Fees
– Land Transfer Taxes
– Land Survey
– Insurance (this is nearly always required by the mortgage lender before closing the deal)
Now that you know how to figure out what you can afford, it’s time to consider what you need in a loan. Many people choose to consult a qualified mortgage broker for advice and direction, however here are the 2 main types of mortgage:
Open Mortgage – Open mortgages have interest rates that are changeable and therefore they will fluctuate over time but there are no penalties for early repayment. This does mean that rates will usually be higher.
Closed Mortgage – Closed or fixed-rate mortgages are loans where the interest rate does not change for the entire duration of the mortgage. Though the rates here are usually lower than other mortgages, you will be penalized for paying off quickly changing the terms.
There are many factors to calculate and consider before deciding to take out a mortgage on a property, but as a consolation you will always be able to remember that once you have paid off the loan the property will be yours. Getting into property as an investment when markets are low and then waiting for upswings is a way to produce capital growth, making a mortgage a good investment vehicle for long-term investment.