When not to take mortgage loans?
When not to take a mortgage loan? My goal with this article is to discuss in detail the taboos that people don’t think about. Let’s face up to reality and take stock of cases when you don’t have to take home loans or think less about credit!
# 1 Your labor market value
One of many subjective factors is the rate of your future earnings. The answer is “I don’t know”. The JTM rule says that you can spend 50% of your verifiable income in October for a 10-year fixed rate loan of $ 400,000 (the limit of $ 500,000 from June 2019).
So the bank does not fundamentally examine your labor market value and the potential you have. They look at your income and project the current data for the future. In case of responsible borrowing you should not be so pleased. You should do very strict self-regulation to accurately determine your labor market value!
What does the pay page say?
It is worth looking at the fizetesek.hu website, which is constantly collecting statistics on the average wages we have available. In terms of position breakdown, we need to look at more things than our current income:
- is the average income in the sector higher or lower? If it’s bigger, we’ve already found a potential that we can use to find more jobs in the future
- how much more can you do in another position in a given area and what to do? This is another potential, because it is possible that we can earn a higher income by applying for a different position within a given area
How do you rate your future?
In self-analysis, is it worth deciding what stage of your life you are going to enter? Will your family or career become a priority? Would you like to work more, less, or the same? Do you want to stay or change at all in your area of expertise?
You will have to ask a number of questions. Here is a list of what you need to answer yourself:
- Want to change job / position?
- Do you have any progress in your current location?
- Is there any progress in your position?
- Do you want to do the necessary thing to make progress? (eg extra training)
- How much do you want to spend more on your family?
- What standard of living would you like to raise?
- How are people looking for your profession?
- Do you imagine your future abroad in Hungary?
Your mortgage loan is based on your potential and not your current earnings
Many make the mistake of adjusting their spending and commitments to their current financial situation. This is very dangerous, as our life can take a more unfavorable turn at any time. Take the example of a financial advisor.
According to statistics, people earn on average 411,534 forints in Hungary in this position. For example, if you are currently looking for gross HUF 1,000,000, you would be able to pay up to 350,000 forints according to the law, which is higher than the average income.
That’s why it is important to ask ourselves how much money we could surely find in our profession if we lost our current job position? The average pay is a good starting point if we are looking above average.
I suggest that we always adapt our binding commitments to the average (such as mortgage loans). For example, as a financial advisor, the monthly mortgage loan you undertake, compared to 411,534, should be a maximum of $ 150,000 a month, regardless of whether you are looking for a gross HUF 1,000,000.
# 2 Family Foundation Plans
We are in different stages of life. Basically everyone is experiencing a stage before, during, or after the foundation of the family. An extremely important aspect is that bringing up a child can amount to tens of millions of forints for families.
We can make responsible decisions with our family in mind. We need to take into account our future plans (eg how many children we want) and the associated costs (eg the cost of birth can be hundreds of thousands of forints).
If the kid is here, can I pay off the mortgage?
It is a very catchy question if we are still aiming for the birth of 1-2-3 children. Think of the fact that you are now looking for a net of 400,000 forints and you would take a loan of 150,000 HUF per month. What will happen to you if all the children arrive and the monthly expenses are at least 100 000 HUF?
This is like paying off 150,000, but 250,000 forints today. Could you be without problems?
According to the survey of children conservation.com in 2017, it is 45-50M forints
I know that for many, the amount of 45-50M for the family budget can be scary and unimaginable per child. Obviously, there is a powerful support in this age of college, which many children receive while others do not.
Certainly, children have a significant monthly spending, which should be included in the family budget. However, until the new “small tax benefits” arrive, it is worth making money from the difference!
For example: We would like to have 2 children in x years, and we expect an extra 40,000 forints per month. From this 40,000 HUF we will continue to provide state-subsidized housing savings to be eligible for state support of 2 × 72,000 HUF per year for a total of 576,000 HUF over 4 years, which will serve our housing goals.
What should we do if the monthly installment does not fit into the budget “burdened with children”?
The title of the article gives a clear answer: “you should not take credit”. However, we can be more subtle than that. We can think of moving to a cheaper apartment, taking less credit.
We move forward with a kind of cascading construction and, with time, we go to the larger apartment and then the house with the smaller apartment. The point is to go in some direction instead of getting stuck in our present life.
# 3 We cannot pay the installer of a 10-year fixed rate mortgage
In all my articles, I try to make it as simple as possible and to put the message into something that everyone can easily use. If I had to answer how you know how much you can borrow, I’d say:
buy exactly the same amount of credit you can pay at any time at a 10-year rate (higher repayment). If you have a serious problem with repaying the 10-year interest rate, and you choose the cheaper variable rate, then you have no money for this loan.
- 106,000 / month, variable interest rate
- 126 000 / month, 10 years fixed interest rate
Note that a floating rate loan can become more expensive and will!
In the table you can see the numbers of a 20-year floating rate home loan. Monthly installment of HUF 110,920. The last line is very interesting. This figure (HUF 4,620,259) shows the surplus that you would have to pay if your first interest rate (1 year) increased by 2%.
So if you take a mortgage with a floating interest rate now, and your interest will rise by 2% in a year (it can be included in the deck smoothly) then you will lose it. almost 5 million forints over the entire term…
Your monthly loan repayment would rise to HUF 131,991, which is higher by almost HUF 5,000 on a monthly basis than if you had taken a 10-year loan from the fund. Ask yourself if you wouldn’t be able to pay 126,000 HUF today, what would you be paying for $ 131,991 in a year’s time?
We must also use the difference
In 2018, people with a variable, 3-year or 5-year interest rate should opt for strategic consideration rather than repayment. The goal should therefore not be to reduce monthly spending, but to justify such reasons as:
- only the cheaper loan is the JTM rule depending on our income
- the difference between a cheaper loan and a longer-term fixed loan is spent on housing savings
- in a couple of years we want to pay the full loan
If none of these reasons exist and you do not choose a long-term fixed loan, you should not take the loan amount even though the bank and the applicable laws allow you!
# 4 We are buying real estate for investment purposes and we are counting the amount that comes from the rental
Often, there is an idea among customers that they would take a new home with the retention of an existing home and a higher loan amount. In return, I would cover the higher loan repayment partly / at the same time as the rent for the remaining apartment – he says he develops himself.
I think it may be a good solution, because money can only be made from money. On the other hand, it can be a very dangerous solution if we cannot pay the increased monthly repayment from our regular income (regardless of the rent). What if we can’t find a tenant for months? And what if our cost of retention is on the property, which will take us up to x months of rent?
Follow the 50% rule
For such operations, it is extremely important that we do not charge our existing property more than 50% of the permissible HBÉ value. If we have a property worth HUF 20 million, we can count on half of the HBÉ (HUF 16 million), ie 8 million forints, if we do not want to get into a difficult situation.
The HUF 8 million may be our own, which can be enough for a maximum of 40 million forints. In this case, our total loan would be 40 million forints (now I do not count on CSOK and other liquid capital), instead of the original 40 million housing price (20 million) = 20 million forints.
In this case, this also means a double payout. For a 10-year fixed rate loan 2x126e = 256e HUF repayment. The question is, how much do we believe in a minimum of 126,000 forints for real estate that would cover half of our loan?
If we can’t pay 256,000 forints per month, then the risk is too high
Of course, the existing property can be sold on paper at any time and the capital debt can be reduced by the selling price. In reality, however, we can easily run into a multi-month sales period or find ourselves in the middle of another real estate crisis, where forced sales would mean selling at depressed prices = realizing the loss.
No one wants to find himself in such a situation. This is why it is important that the mortgage loan you have recruited is paid out even when extra income sources such as rent are extinguished.
# 5 If you don’t have at least $ 1 million left on your account
While we are spinning on mortgages and homes, we tend to forget about the additional costs. Surprisingly, I often ask my clients at the planning stage how much money they have left after paying for their own resources?
Just a few items about shopping:
- attorney’s fee is 150-300,000 forints
- notary fee is 50-100,000 forints
- valuation 30,000 forints (often refunded afterwards but must be prepaid for weeks)
- Land Registry Fees: 25-30,000 Forints
- the fee may vary, but may be as high as 500,000-1,000,000 for such a property
- moving 30-50,000 forints
- painting 30-60 000 forints
- kitchen furniture 300-500 000 forints
- … etc.
Have you thought about the cost of buying a home that could be a million item in excess of your own resources? This is a problem because everyone typically collects self-help and does not deal with the “obligatory” items just listed.