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Before you start looking on the real estate market for the perfect home, the first question you need to be able to answer is how much of a home you can afford. Knowing the answer to this question will help you to search for homes within the correct price range even before applying for a mortgage.

In my last article I explained how to calculate your debt-to-income ratio. This is one of the most important factors that a financial institution will use as a rule of thumb for how much you can borrow. This ratio takes into account a mortgage payment plus other personal debt you have such as car loans, personal loans or credit card debt. This ratio is expressed in a percentage of how much of your income is being used to make debt payments. The typical guideline used by most lenders is a ratio of 36% as the upper limit.

First you will need to determine your monthly gross income and if you are married and would like to apply for the mortgage jointly you can add both incomes. Then take the number for the combined gross income and multiply by 0.36(36%).

E.g. You and your spouse have a joint income of NAf 7.000.
NAf 7.000 x 0.36= NAf 2.520

This means that your total monthly debt payments should be no more than NAf 2.520 mortgage payment included.

The next step is to determine the total of you non-mortgage debt payments such as personal loan or car payments. I will assume your non-mortgage debt amounts to NAf 500 per month.

To calculate your maximum mortgage payment: NAf 2.520- NAf 500= NAf 2.020

From the above example I have determined that the home you can afford is with a mortgage payment of NAf 2020, which will include homeowners insurance premium and mortgage life insurance. A loan of NAf 275.000 with an interest of 6% and a term of 30 years will result in a monthly payment of about NAf 1.650.(you can find a simple mortgage calculator on the internet to establish the principal). The homeowners insurance for a dwelling of NAf 275.000 will amount to approx. NAf 275 per month and the mortgage life insurance will amount to NAf 100. Mortgage life insurance is the insurance that is meant to pay off your mortgage in case of your death while the mortgage is not fully paid.
Total mortgage payment= 1650+ 275+100= NAf 2025.

The above calculation demonstrates that a couple with a joint income of NAf 7.000 per month can afford to buy a home upto NAf 275.000. Unfortunately the real estate market prices on Sint Maarten are very high and NAf 275.000 will not get you much of a home, but perhaps rather an appartment. Nevertheless it may be worth to begin with owning something ‘smaller’. Real estate prices have a record of going up and it is likely that you can sell your appartment with profit in the future. This will allow you to make a downpayment on your next home so that you can purchase something larger. Remember rental payments will never come back to you and don’t forget about the tax advantages of a mortgage as well.

My grandfather always used to say: “Young people without debt are old people without money.” Some food for thought

Myrtille Brookson

A home is probably the largest investment most people make in their lifetime. Finding out if you are covered sufficiently might keep you from being at risk of a major financial loss should a disaster (think: hurricane!) affect your home.
In the unfortunate situation of underinsurance you can find yourself responsible for tens of thousands of guilders or dollars of unexpected out-of-pocket costs to rebuild your house. You may even be financially unable to rebuild a house like you had prior to your loss. Imagine that: less home with the same mortgage at the bank.

Sum insured
The sum insured is the maximum amount you could be paid under your policy. You need to make sure this amount is enough to replace your home.

Underinsurance
In case of underinsurance the sum insured is lower than the real value of your home. By law it is established that an insurance company may not pay more in claims than the amount of the sum insured. The law also dictates that in case of a claim, benefits must be proportionate.

Claims will be calculated according to the following formula:

Claims payment= sum insured x damage
real value

Example: You have your home insured for an amount of NAf 450.000. The damage to your home is NAf 200.000 after the passing of a hurricane. After inspection it is concluded that the real value of your home is NAf 600.000. If we apply the abovementioned formula this will result in:

Claims payment = 450.000 x 200.000
600.000

The claims payment will be: 0.75 x 200.000= NAf 150.000
The sum insured was NAf 150.000 too low, so that you’ve also been paying a similar (proportionate) amount less in premium for your home insurance coverage. The excess of NAf 50.000 (!) between your actual damage of NAf 200.000 and the claims payment of NAf 150.000 will have to come out of your own pocket.

The best way to avoid underinsurance is to have your house appraised by a certified appraiser. If you have a mortgage on your home, you’ve probably had one made as this is usually one of the requirements for financing as well. The appraisal report will give you insight into the market value of your home (the price you could currently sell for on the market including your lot) as well as the reconstruction value. Remember reconstruction value is not the same as the market value. It is the cost to rebuild your house from the foundation up with materials of similar kind and quality. You should also not assume that coverage matching your mortgage balance is sufficient to rebuild your home. The amount of insurance you buy should be based on rebuilding costs, not the selling or purchase price of your house.

As market conditions change and the cost of construction also rises you need to adapt your insured value on a regular basis. A good moment to (re)evaluate is at the time of your yearly renewal date. Some policies automatically adjust the insured value for inflation, however if this is not the case you are in charge to instruct the insurance company to increase your sum insured if necessary.

Take some time out to study your insurance conditions and make sure you are covered for all your property’s worth!

For further advice please contact ENNIA or your insurance adviser.
 

Everyone would like to know how they are doing financially and the easiest way to find out is to look at your income on one side and your debt(s) on the other side. Naturally you prefer to have more money coming in than debt payments going out, but even if you make more money than you owe, how do you know it is good enough for e.g. taking out a mortgage? A quick calculation of your debt to income ratio can give you an idea and can help you to take ‘big’ financial decisions such as figuring out how much money you can borrow to buy a house. Calculating your debt to income ratio is as simple as adding up all of your debt and subtracting it from your income.

To get started, take a moment to assemble all of your monthly debt obligations. This will include monthly payments such as:

• Mortgage payments (don’t forget to include the payments for property insurance, term-life etc.)
• Car payments
• Minimum credit card payments
• Personal loan payments
• Student loan payments
• Child support

Adding all these numbers will give you your total monthly debt payments.
Next you will need to calculate your monthly income. You start with your salary, but you may add any additional bonuses (yearly or quarterly, just be sure to add the monthly amount). Furthermore you may add up any additional income you receive e.g. from a side business, rental income (banks usually use 50-60% of rental income). Total everything and this will give you your total monthly income.

To determine your debt to income ratio you simply take your total debt payment and divide it by your total monthly income. That equals your debt to income ratio.

Example: If you came up with a total monthly income of 2500 guilders and a total monthly debt payment of 825 guilders, that leaves you with a debt to income ratio of 825/2500= 0.33= 33%

What does this number mean? Obviously you would like this number to be as low as possible. The less debt you have relative to your income, the better off you are financially since you have extra money left over to use for reaching your other goals.

Financial institutions (lenders) often look at two key debt to income ratios when it comes to mortgages.
Front ratio: which is the debt to income ratio that includes all housing costs.
Back ratio: which looks at your non-mortgage debt to income ratio.
Generally speaking lenders would like to see your front ratio at 36% or less and your back ratio at 28% or less.

Keep in mind that these ratios are only guidelines and that there are many other factors that go into determining how much you can borrow and at what rate. However if you have a general idea of how it works, you can play with these numbers to see where you stand and how you can improve your situation.

Based on the above you might realize that your car can actually keep you from purchasing your own home. Car (loan) payments count when calculating your debt ratio! If you’ve just bought a new car of e.g.  27.000 guilders your monthly payments (excl. insurance) will already amount to about 560,- guilders (depending on interest owed + duration)
Imagine in the above example: your debt to income ratio will deteriorate from 33% to 55%. (825+560/2500) because of your car loan.
No financial institution will provide you with a mortgage with your front ratio far over 36%.

It is important to realize that when you decide to purchase a car, your debt to income ratio may not allow for any other purchases during the time that your are repaying the car loan. Instead of going for the fast new ride, it might be wiser to invest in something for the long run, such as your own property.

For more information click here to contact ENNA.