What You Need to Know Before You Purchase Your New Property

27 June 2021

Are you thinking about purchasing real estate? More than likely, it will be the most expensive and most important financial decision of your life which may affect your long-term wealth. So here are some questions to ask yourself and some calculations to help you to make one of the most important decisions, one of your best decisions.

1. What Can I Afford? In order for a mortgage application to be approved, your total debt service ratio (TDSR), which indicates your ability to repay your loan, should be less than 45%. If it above, 45% you may consider purchasing a less expensive property or using a higher deposit in order to make the monthly payments more affordable.

TDSR = Total of all your current monthly loans repayments, inclusive of your new mortgage ÷ monthly gross salary.
For Example: J$50k (car loan) + J$100k (potential mortgage)/J$400k (gross salary) = 37.5%.
In this example, this person’s TDSR is satisfactory.

2. Will I have enough money for an emergency fund, after paying the deposit and any other costs? Many persons use all the funds saved when making the deposit on the property. However, financial emergencies ALWAYS occur. It is therefore important to leave at least 3 to 6 months of your expenses in an account for those unexpected financial curveballs.

3. (HOME TO LIVE IN) Will the value of the property increase above inflation, keep pace with inflation, or lag behind inflation? For the purchase to be financially wise, the appreciation in property value should at least keep pace with inflation. There are also other hassle-free investments that would give you a rate of return greater than inflation and they would be easier to sell than purchasing real estate.

% Appreciation= (Market Value –Selling Costs) – (Purchase Price + Purchase Costs +Repair Costs) x 100

Purchase and Repair Costs

E.g. (J$14 M – J$1M= $13M) – (J$9M + J$3M = J$12 M) x 100= J$1M x100 = 8.33%

12 Mill J$12 M

The Bank of Jamaica’s (BOJ’s) inflation target, inflation for the fiscal year 2021/2022 is 4% - 6%. Therefore, this property, at this point in time would be a good buy!

4. (INVESTMENT PROPERTY) Does this property offer a good return on investment (ROI)? It is important to calculate the ROI on one property vs. another property and against other investments in the market, such as stocks, bonds, unit trusts etc. Remember to also factor in that the property may not be rented for all 12 months of the year, or the tenants may become delinquent.

ROI = Annual Rental Income Received– All associated expenses, including mortgage

Deposit + Total purchase fees

E.g. J$480,000 – (J$150,000 + J$240,000) = 6%

J$1,000,000 + J$500,000

Total ROI = *% Price Appreciation of the Property + ROI à E.g. 8.33% + 6% = 14.33%

In this example the Total ROI shows this home as a good buy.

So are you ready for that new property? With a JMMB mortgage, you will benefit from discounted legal fees, security systems, hurricane shutters, mosquito screens and more. Please give us a call on (876) 998-5662 to get started.

*Projected appreciated of property/ projected valuation

Written by Michelle Sinclair-Doyley

Manager, Group Financial Partnership Support & Financial Education, JMMB Group