Most of us cannot buy our dream properties cash…. so, we require a mortgage. Financial institutions all have their own internal regulations but most will grant a mortgage based on the market value, so in certain areas, where there is a danger that property valuations are inflated, financial institutions will possibly lower their commitment, thereby reducing their loan to value.
The basic home financing deal is calculated on the following basis:
- 20% down payment of the property value (minimum 10% cash and the rest may be taken from the pension fund).
- 80% mortgage of which 65% of this represents the first mortgage and does not need to be repaid (depends on your financial situation at retirement).
- Second mortgage, which represents 15%. This mortgage needs to be repaid (*directly or indirectly) over 15 years.
What can I afford?
In essence, the below calculation is used by the financial institutions, using inflated interest rates (if interest rates increase) and commonly known as the stress test. The below represent yearly costs:
- 1% of the purchase price (ancillary and maintenance costs like heating, warm water, replacement of windows, painting of the facade, etc.)
- 5% interest rate of the mortgage
- Repayment over 15 years of the second mortgage capital (amortisation).
If the above costs are lower than 33.3% of the gross annual salary, then a mortgage may be granted.
* Direct versus indirect amortisation
Direct. With direct amortisation, you pay back your mortgage to the financial institution in regular instalments. The mortgage debt is thus steadily reduced as are the interest rate payments. However, your tax liability also increases as you can make fewer tax deductions.
Indirect. With indirect amortisation, you invest into a pension savings account or life insurance policy under pillar 3a/b. The mortgage thus remains at the same level for the full duration allowing you to make ongoing tax deductions of the mortgage interest and the savings can be used to repay the second (and parts of the first) at the end of the period.
We suggest that the process of buying your dream home be used to take stock and to obtain a financial overview. Questions that should be answered:
- Will my home be affordable at retirement?
- What effect would the loss of the main income earner have for the rest of the family?
- Overall tax implication
Come speak to us. We will guide you through the process and seek a suitable financing partner in line with your financial requirements.