Determine your Budget

Shopping for a home can be lots of fun; but beware of falling in love with a property beyond your affordability. Buying a home with an excess budget can sacrifice your future by postponing your retirement; depriving your children of better education; and discouraging you from a vacation.

It is important to set your budget by figuring out how much you can Buy and Afford before home hunting.

What you can BUY depends on:

1. How much cash you possess for Down Payment and the Closing Costs?

2. How much loans a mortgage lender is willing to offer?

Cash + Mortgage Loan = Potential Purchase Price

Most homes are purchased with cash plus a mortgage loan. The cash is mainly for a down payment but a small amount is needed for closing costs. The mortgage loan covers the difference between the purchase price and the cash down payment.

What you can AFFORD depends on:

How much you can handle with ease for Monthly Installments?

Monthly Income - Monthly Expenses - Monthly Debt - Monthly Savings = Affordability on Monthly Installment

Based on your lifestyle and needs, consider how much you are willing to spend on the purchase of a home. You may not be willing to invest as much of your income in buying a house as you can actually afford.

Three-Step Process on Determining Your Budget:

Step 1: Review the Cash you Currently Possess

The cash you currently have available can be used to support your up-front payments including down payment and the closing costs for your home. Remember to reserve some cash to support non housing-related expenses and emergencies e.g. urgent medical expenses. Most lenders prefer homeowners to remain at least three months of living expenses available after closing on the loan.

The up-front cash requirements include: Down Payment – The conventional minimum down payment requirement in Hong Kong is 30% of the home purchase price. A higher down payment requires lower mortgage loan and generally translates into lower loan interest rate requirements, thus resulting in lower monthly installments; while a lower down payment may let homebuyers qualify for a higher purchase price but it also asks for a higher mortgage loan with higher interest rates and monthly installments.

Closing Costs – Homebuyers should pay those up-front costs when closing on a home. The closing costs in Hong Kong generally include the registration fees and taxes to the government and some miscellaneous expenses e.g. commission to property agents, mortgage insurance, and legislation fee to solicitors.

Step 2: Affordability Calculator

Try to discover your affordability on monthly installments by calculating your Income, Savings, Debts and Monthly Expenses.

1. Income

Income Category	Monthly $
Salary
Commission
Bonus
Interest
Dividends
Other
Total:

2. Savings

Savings Category	Monthly $
Savings Account
Current Account
MPF Contributions
Fund Investments
Other
Total:

3. Debts

Debt Category	Monthly $
Credit Cards
Car Loans
School Loans
Alimony
Child Support
Other
Total:

4. Monthly Expenses

Income Category	Monthly $ (current)
Utilities
Car Expenses
Insurance
Medical Expenses
Clothing
Taxes
Entertainment
Purchases
Child Support
Total:

Basically, your income, savings, debts and monthly expenses play an important role in determining how large a mortgage you can afford. To figure out the amount you can afford, please click Affordability Calculator

i.e. Income – Savings – Debts – Expenses = Affordability

By using Affordability Calculator, you can estimate how much house you can afford and what your loan qualification potential for monthly installments will be. Lenders will review your income, debts, savings and expenses information to determine how much money they are willing to lend you towards your home purchase.

Step 3: Determine your Budget with Mortgage Calculator

Set parameters onto Purchase Price and Loan Amount of the Mortgage Calculator and then press [Interest Table] to obtain a table of monthly installments against various Interest Rates and Mortgage Terms.

Click here to Mortgage Calculator.

Measure your ability to afford the Purchase Price by comparing the figures:

1. Can your available Cash cover Down Payment + Miscellaneous Expenses + Registration Fee & Taxes?

2. Can your afford the Monthly Installments?

By repeating the above procedure by inputting different purchase prices and loan amount, you will come up with a range of Affordable purchase options with various Mortgage Terms and Interest Rates.

Then, it will be the time to determine your budget with the purchase option you feel more comfortable with.

For more information about Mortgage application, please go to the other topic Mortgage.

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