What Is A Real Estate Rent To Value Ratio?

Can You Afford To Buy A Home?

When borrowing to buy a house, there are many things you need to take into account. The value of your desired property should correspond to how much you earn in such a way that you can see a point in the future when you would be able to make a final payment and clear your mortgage to own the house outright. Opinions differ on what proportion you should stay within in terms of salary to mortgage, with many people being of the opinion that you should spend no more than five times what you earn in a year to buy a house. Certain experts on the market say that you should consider it on a proportion of rent to valuation. That is to say that you should consider how much you can afford to pay in rent, and multiply it by a certain amount to get the ideal value.

Those who view it as a rent/value issue tend to agree on a proportionate value for a new house as being $125-$150 on a house for every dollar you pay in rent. Looking at it like that means that if you were renting for, for example – $1,000 a month, you could buy a house valued at $125-150,000, and so forth. If you paid back the mortgage at the same rate as you paid your rent, you could own the house in just over twelve years, depending on the proportion at which you set the bar and allowing for interest rates and fees. This does seem like a reasonable ratio, taking into account that your income and your other living costs may begin to vary either within or just after the end of that period. It also allows for fluctuation in interest rates.

Due to the situation that we find ourselves in at the moment with a view to the global economy, there are currently uniformly low interest rates in most of the bigger mortgage markets throughout the world. If you are in a financially strong position at the moment, unlike many people, you are in a stronger position than ever to afford a mortgage because the lower interest rates make the extra costs over and above the value of the house negligible compared with the same situation three to five years ago.

Additionally, the ratio set out above (of 125/150-1, value to rent), will grow if interest rates drop and fall if the rates rise. Looking at how much you pay in rent right now and taking into account the likelihood of a further drop, you can have a justifiable valuation for the house you can afford to buy. Of course mortgage rates depend on your own financial situation and the likelihood of that situation changing, as well as other aspects relating to your personal situation. Financial experts are currently suggesting that if you can find a mortgage with an interest rate of less than 5%, it is good value, unlikely to drop much further and you should take it, if all your requirements are satisfied.