Home acquisition, your biggest asset

By Finbar Garcia LUTCF, FSS, MFA

Many people dream and wish to acquire their own home, but at times it can be a daunting task just thinking about it. Planning and discipline are two important components in achieving this, along with other financial aspects.

There are some important areas that you need to investigate before jumping into this major financial decision in your life. Let us look at some of them.

Buying a house is not cheap, as this investment should appreciate over time, so understanding where you want to live is the first step.

Location

This is very important, as financial institutions will use this as a guide in determining your mortgage. The reason is that they are making a financial investment on your behalf, so, if for any reason they need to take possession and sell the property, they won’t want any issues.

Cost

Clearly this is a major factor, as we all know properties are always going up in cost, so planning early is vital. Most mortgages require a downpayment along with other legal fees and costs, so understanding the figures is important. You can work with about 15 per cent of the value, ten per cent as the down-payment and five per cent to cover other fees.

Income

Will this mortgage be joint or single? Clearly joint (married working couple) will mean that both incomes will be considered in the processing stage. If one person’s income is large enough to carry the mortgage, it can still be joint on the Title Deed.

Age

This is your age and that of your spouse, if applicable. Mortgages tend to be long-term amortised loans, over periods of 20 to 30 years, so the younger you are, the longer the mortgage can be carried. Of course, more interest will be paid. Time is of the essence, as you won’t want to be carrying a mortgage for your first home into retirement, and using your pension to pay the instalments.

While some institutions go beyond the average age of 60, maybe to age 70, this is something you will need to carefully consider. It’s not just one area you need to look at; it’s a holistic approach.

From a risk assessment point, you will need to have emergency funding mechanism in place, just in case your health becomes an issue and you need to take early retirement.

Mortgage Loan

Most institutions offer fixed, variable or combination of both with regards to the interest rate on the mortgage. What this means is simple. A fixed interest rate mortgage will indicate the exact instalment every month over the period of the loan.

Sometimes it’s fixed for a certain number of years, then move to variable interest. This can work in your favour, as well as against you. If the initial interest rate is fixed for a certain number of years, and you set your budget based on the fixed instalment, then the variable rate kicks in, and is higher than the fixed rate you had before, your instalment will be increased, and this will create some financial adjustments and maybe concerns. The flip side is if the interest drops below the initial rate, then your instalment should be reduced. How often does this really happen?

Debt Servicing Ratio

Any time you are entering into a loan agreement, the institutions will look at your debt servicing ratio (DSR). This is your income and expenses, and any major loans should not cross 35 per cent–40 per cent of your gross income.

So, let’s say this is a joint mortgage for a property costing $1,750,000 and the bank is willing to finance 90 per cent at an interest rate of 7 per cent over 30 years, that’s a mortgage loan of $1,575,000 plus the interest. Your instalment will be approximately $10,485 per month.

If both incomes together are $30,000, and the bank uses a 35 per cent DSR, then your DSR and possible instalment are close, so you may qualify. However, there is an option to make a larger down-payment to buffer the DSR and reduce the instalment.

Insurances

This is a MUST. Regardless of what people tell you, or if the institution says you don’t need to have it because they are holding the house as first security. There are two types of insurance you will need to have in place, that is Life and Critical Illness Insurance and a Comprehensive Fire Insurance.

The reason for this is simple: who will pay off your mortgage if you die or become critically ill during your working life? Which family member or friend will take over this financial burden?

It’s prudent financial planning in having a life insurance policy on both parties of the mortgage, so if anyone dies during the mortgage period, the loan is totally paid off, and your home is now debt free.

The Comprehensive Fire policy is to protect the asset, allowing you to repair any damages to the property, and even recover and replace your contents.

Setting your timeline to acquiring your dream home is critical. Start saving for the downpayment and extra cost at least five years before. Using the example above, you will need to save at least $4375 every month for five years to have that $262,500 as your initial investment.

“Prepare your work outside; get everything ready for yourself in the field, and after that build your house” – Proverbs 24–27

Call me for more information on planning your financial future. Send your questions to myfinancialadvisor2020@gmail.com or call 620-1185.