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Do the math before taking on a mortgage.

It's always favourable to seek financial advice from an expert before taking mortgage finance. It helps to visualise what you want to achieve and assist in setting strategies accordingly.

Buying a property is one of the biggest personal expenses one can commit to in a lifetime. Hence, take some time to do basic calculation before taking on an enormous debt.

Regardless of how much you earn or what type of house you are looking for, the first question likely to be directed at you while shopping for a mortgage is -- 'How much can you afford?' The answer to this depends on numerous factors, including savings, income, your location and, most importantly, the buying plan.

It's always favourable to seek financial advice from an expert before taking mortgage finance. It helps to visualise what you want to achieve and assist in setting strategies accordingly. Plus, it also saves time.

People who are looking to buy a house can generally afford to take on a mortgage that costs between two to two-and-a-half times their gross income. The minimum deposit you need to make is 25 per cent of the property's value. Think about your present and future lifestyle and make an informed decision.

Now, let's consider the lender's perspective. They use formulae that are complex and thorough to gain a precise idea of what size of mortgage their clients can handle. They consider two factors, front-end and back-end ratio which contributes to the decision.

The front-end ratio calculates the yearly gross income devoted towards making the monthly payment, which consist of three components which are principal, interest and insurance. A rule of thumb is that it should not exceed 30 to 35 per cent of your gross income.

The back-end ratio referred to as the debt-to-income ratio calculates the gross income percentage which covers your debts, including mortgage, credit cards, child support and other loan payments, including how much cash you will be able to accumulate for a down payment. However, as per the UAE Central Bank law, a lender calculates the loan eligibility by taking 50 per cent of the total monthly income.

Buying a house is an exciting venture, nonetheless while shopping, one should not forget the financial responsibilities of homeownership.

A mortgage is certainly the main cost associated with a home, but then there are added expenses such as maintenance, utilities, furniture and decor which need to be considered.

Before you consider buying a home, as a rule of thumb, one should have at least four to six months' expenses (including EMI) in a savings bank account or in a money market instrument.

As for prudent financial planning, you should invest in such a manner that your investment corpus fund value can match at least half the outstanding principle. In rainy days, this corpus can be used to redeem the part of the outstanding mortgage amount.

Therefore, if you are thinking of buying a property, have a good credit score and feel secure about your employment. Sit down with a mortgage

expert and discuss the situation. Based on your income, they can give the best advice on mortgage products available in the market.

The writer is the managing director of 4C Mortgage Consultancy. The views expressed by him are his own and do not reflect the newspaper's policy.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Date:Jun 23, 2015
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