Wednesday, November 28, 2007

Investing in a property

How much should you invest in a property?

I suggest that the value of the property should be 5 to 7 years of your annual income. If your income is $50,000, your property should not exceed $350,000 (i.e. 7 years). You can add the combined income, if both spouses are working.

If you take a 30 year loan at 2.6% interest, the annual repayment will be $16,900 or 34% of the income. If interest rate increases to 4%, the annual repayment will increase to $20,240, or 40% of income.

It is all right to commit 34% of your income to your property. At 40%, you are stretching your cash flow.

The burden will reduce in the future, with increases in your income. However, you have to consider the impact of increases in interest rate or a possible reduction in income due to unemployment or change of job.

If you wish to be prudent, you should buy a property that cost 5 times of your combined annual income. At 2.6% interest, the repayment is 24% of income. At 4% interest, it increases to 29%.

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