One of the most important tasks in your life is likely to be the management of your mortgage debt.
Probably the most important criterion in examining your ability to take on the responsibility of a mortgage is your existing debt service ratio. This ratio is measured as the proportion of your total instalment payments of your gross personal income.
If you were considering the mortgage as a member of a family sharing such responsibility, this ratio would be measured as the proportion of the total of those family member’s instalment payments of their total gross income.
Husbands and wives and similarly committed couples may team up in this way.
The total instalment payment would be all other instalment payments plus the proposed mortgage payment. Conservatively, a rule of thumb is that the total instalment payment should not exceed a third of the gross personal income. Using the gross income assumes there will be some income tax relief while servicing the mortgage.
More often than not, this ratio is assessed on a monthly basis. However, persons with uneven income flows during the year may also apply this rule on an annual basis, provided that all the instalment payments can be met as they fall due.
For example, if the gross family income is $5 400 per month and the current service of other debt is, say $620 per month, then a mortgage payment of $5 400/3 less $620 would be tolerable. This is, $1 800 less $620 that gives $1 180. A mortgage of $1 180 should be reasonably comfortable, all other things being equal.
Then, there are two major points about the mortgage period. One relates to the age of the mortgagee and the other relates to the savings available. The mortgage period will depend on the age and the paying capacity of the mortgagee. Most mortgagors will not consider a mortgage period that will extend beyond the mortgagee’s 65th birthday. The typical age at which householders seek a mortgage is between 25 and 35 years old.
Where the mortgage period will extend beyond the 65th birthday of the mortgagee, the period for repayment may be reduced commensurately. Thus if you are 35 years old, you may qualify for a 30-year mortgage if other terms are acceptable to you.
Yet, although you may qualify for a longer period mortgage you may opt for a shorter one based on your ability to pay. The sooner that you repay your mortgage loan, the less cost to you. Yet, the shorter the mortgage period, the higher will be your monthly payment. On the other hand, you may ask to extend your mortgage period to better match your ability to pay.
For example, for a $200 000 mortgage for a 25-year period at a ten per cent interest rate, you will pay cash totaling just over $545 000. For the same mortgage over a 20-year period, you will pay cash totaling approximately $460 000. You can save over $80 000 in cash by paying over the shorter period.
