Living within your means is a tried-and-tested formula to achieve financial health. This is as true for your daily expenses as it is for a major purchase, such as a buying a home.
Even if you have enough cash for a down payment and a bank or lender has approved you for a loan, you have to carefully consider whether your income can accommodate monthly mortgage payments. Unlike credit card debt, which can be paid off in a span of months, your monthly mortgage payments can continue for decades.
Therefore you should make sure that you have a solid buying strategy to ensure that your financial health remains intact, and to allow your family to get settled into their new home without any worries.
The 2.5 Rule
One of the two rules recommended by financial advisors is the 2.5 rule. This states that you should multiply your annual income by 2.5, to find out which property you can afford.
If you are making Php50,000 a month (after taxes and other deductions), your annual income will be Php650,000 (multiplied by 13 as Philippine law requires all companies to pay their employees 13th month pay); hence, the property you can afford will cost about Php1.625 million.
There is a wide selection of properties listed on Lamudi for Php1.625 million. A duplex or a modest single detached home in the provinces of Cavite (Bacoor or Dasmariñas) or Laguna (San Pedro or Santa Rosa) might be a suitable option. The Skyway and Manila-Cavite Expressway have made this journey easier and more convenient for daily commuters. However, for those who prefer to live within the Metro area of Manila, there are houses or apartments for under Php1.625 million in Valenzuela, Caloocan, or Las Piñas.
The 28 Percent Rule
The second is the 28 percent rule. This states that you should not spend more than 28 percent of your monthly disposable income on housing (mortgage repayments or rent). Anything higher than this and you will find it difficult to cope with your monthly payments.
Using the above example of Php50,000, you should not spend more than Php14,000 on monthly mortgage repayments. A property amounting to Php1.625 million, after paying a deposit or down payment of 20 percent (Php325,000), will leave you with Php1.3 million loanable amount from a bank or lender. Using an annual interest rate of 7.5 percent, a fixed-term period of 5 years, and a loan tenor of 20 years, you will be paying a monthly mortgage of Php13,091, which is well within your Php14,000 budget.
Owning a home also comes with other expenses. Besides the purchasing price of the property, the buyer will need to set aside money for the documentary stamp tax, transfer tax, registration fee, notarial fee, and loan fee (while the seller will take care of capital gains tax and the real estate brokers’ commission).
Additionally, there are is also a homeowners’ association and/or condo fee, which will be utilized for the upkeep of common areas (such as hallways and swimming pools) and other services, including security and trash removal. Banks will also require a mortgage life insurance, in case of default, which can however be avoided if the buyer makes a large enough down payment on the property.
Although the above advice provides a general overview of how much an individual can afford, they should only serve as guidelines. Lamudi urges potential homebuyers to consult experts, such as licensed brokers, accountants, loan officers, or even lawyers to ensure that the purchase is economically sustainable.