So you’ve started to consider the purchase of an apartment. Congratulations! But how will you know the maximum value of an apartment which is within your means to buy with a mortgage?
There are two main criteria which determine the approval of a mortgage- the cost of the property and the borrower’s solvency.
Cost of property – Mortgage banks are willing to approve a mortgage of up to 75% of the cost of the apartment to borrowers who own only one apartment, 70% to borrowers with an existing apartment that they’re about to sell and 50% for borrowers with an existing apartment. Hence, the borrower must supply 25%/30%/50% accordingly of the apartment’s cost with personal equity
The calculation is simple. First you must calculate the personal equity- the sum you’ve intended for this purchase minus taxes, lawyer and realtor fees etc. (about 11% of the personal equity on a first property, or 15% on following purchases). Then divide this sum by 0.3 (0.5 for following purchases). The result represents the maximal value of property which you can purchase.
• Note that even on the purchase of a first apartment, banks are not always willing to offer a 75% mortgage. For example, if said apartment is on a high floor with no elevator, if the apartment is in a “problematic” area, has illegal additions to it, etc. then the bank may approve a mortgage with a lower ration.
In order to know what the expected monthly return on this mortgage is you must multiply the sum of the mortgage by 0.0055. This new sum represents the expected monthly rate on your mortgage for the next 20 years, based on today’s interest rates.
Solvency- Generally, banks will approve a monthly payment of up to a third of the borrower’s available net income, and in certain cases, up to 40%, (For example, if the apartment at hand is intended for an investment or if the borrowers are very trustworthy).
Calculation of maximum solvency – First you must calculate your net income minus other loan payments and alimony payments. Then, multiply that sum by 0.33 in order to get your maximum solvency.
• Please note: to the solvency we have just calculated you must add additional costs such as life insurance (a pre-requisite to getting a mortgage), and mortgage insurance. Your bank may not include these calculations, but your bank account sure will!
Interested in an automated calculation? I’ve created this form for you:
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