Affording a property - What is the price of property that I should look for? From Loan Perspective

One of the major concerns among all the home buyers is the "how much loan can I borrow?". I believe the answer would eventually become the guide in helping the buyers to target the right property which within financial capacity.

Putting your initial budget aside, the main question here would be "how much loan you might be able to get from a bank?". From the view point of a bank, their concerns are simple. It is just whether you do have sufficient stable income to pay for the installment. Base on s simple rule of thumb, the banks would be comfortable to give you a loan if your new loan installment does not exceed 40% of your current gross income while your total monthly commitment shall not exceed 50% of your gross income, thus, you could roughly project the property price which within your capacity with the calculation below.

Calculating based on your monthly income & commitment


Step 1. Gross Monthly Income / 2 = A
Step 2. A - Total Monthly Commitment = B
(Total Monthly Commitment inclusive of Hire Purchase, Home Loan, Personal Loan, Credit Cards, Overdraft & other Term Loans)
Step 3. B = Remaining Capacity for a mortgage

For a general reference, if B is equivalent to

(i) RM 500, Loan amount eligible should be RM 105,000, property that you targeted should be priced around RM 116,000
(i) RM 1000, Loan amount eligible should be RM 210,000, property that you targeted should be priced around RM 232,000

** Illustration above is generated based on a loan tenure of 30 years, margin of financing at 90%

However, it should be noted that the chance of getting a loan is still there if you are looking for a property which priced above the projected pricing but it would be a harder approval.

For example,

Your current gross income is RM 3000, Total Monthly Commitment at RM 1000, thus,
Step 1. A = 1500
Step 2. B = 500
Thus, the property price you should look for is around +/- RM 116,000

However, please be noted that there isn't any perfect answer for this kind of question as this is a generalization of estimation & guidelines are varying across the banks, thus the final outcomes might be deviated from the illustration above.

8 March 2011, Chris