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Estimating your mortgage payments

December 8, 2017

One of the very first things you'll need to know when assessing a deal is what your mortgage payments will be. There are 2 approaches I can think of here; work it out yourself or get your broker to do it for you.

 

The idea of getting your broker involved sounds great at first. They can scour the market for the latest deals and you can be told to the penny just how much you will need to fork out every month. This is very useful information and it is critical in the final stages of working out whether a deal is right for you or not.

 

However, if you have only just found a deal, you're probably only going to need an estimate of the mortgage value. Let's say you've just spent 30 mins on the net and found half a dozen potential deals; ringing your broker at this stage and asking for 6 sets of data on potential purchases is quite likely to frustrate him/her.

 

Working out an estimate of the mortgage payment in just 30 seconds at this stage will help you to decide how much potential there is the deal.

 

The key assumption that I have made for the purpose of this calculation is that the mortgage product is interest only.

 

Here's the information you will need:

 

Loan amount: this will typically be 75%-90% of the purchase price and is sometimes referred to as the Principal

 

Interest rate: interest rates can vary over the lifetime of a product; the key here is to pick an interest rate that is higher than the one you intend to pay. By doing this you will be building in room for interest rates to increase in the future, whatever that reason may be. For example, if you expect to pay 3%, then do your calculation at 5% or even 6% and see if you can still make the deal work further down the line.

 

From just these 2 numbers we can estimate the mortgage payment using the following:

 

Payment = Loan Amount x Interest rate (gives us the annual cost)

 

EXAMPLE:

For a loan of £72,000 and an annual interest Rate of 5%:

 

The mortgage payment (interest only) will be (£72,000 x 5% =) £3,600 per year or £300 per month.

 

Now that we have this figure, we can start to think about how much rent we need to return a profit.

 

But that's another story...

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