How Much to Loan for Your Home

Recently, we covered the general guidelines when buying properties. Following this, one important thing to discuss is your finances. And one of the most common ways to pay for it is to borrow money from banks. So with that, here comes the question of how much a person should loan.

It’s crucial to know that borrowing too much can have several negative effects. Some of them are increased interest costs, the risk of default, and financial instability. While buying a property, especially your own home, can be one of the most exciting things one can do, we shouldn’t just simply go all in. Don’t put all your money into it and borrow the maximum amount the bank will approve.

To understand this better, let’s talk about these three (3) essential ideas.

Monthly amortization should only be up to 30% of your household income.

Let's say you're the sole income earner in your household, and you're earning PHP 120,000 monthly. The maximum amount you can take as your monthly amortization is 30% of PHP 120,000, which is PHP 36,000. And the reason behind this is cash flow flexibility.

Total Income = PHP 120,000
Maximum Monthly Amortization = PHP 36,000

Being flexible with your cash flow means being able to handle and control the money that goes in and out of your personal finances. Think of it like a water faucet where you can easily control the flow of water. It’s about having the freedom to adapt your spending and savings as needed to account for any changes without experiencing financial difficulties.

For most, purchasing a home for your own use gives a different sense of accomplishment. Add on to that the feeling of security and peace of mind that it can give. But let’s not forget that we have other expenses like food, utility bills, insurance, transportation, school tuition, etc. There are also unexpected costs, like hospitalizations and house repairs. And on top of the daily and monthly expenses, we also need to save up for college tuition, retirement, and an emergency fund. This doesn’t even include the costs of our dream vacation or the capital for the business venture we want to start. So to put things into perspective, housing is just really one slice of the pie.

That’s why you can only allot up to 30% of your total income to your home. Even if you’re planning to rent it out and use the rental fees as payment, it’s still better to not include this in the computation. We don’t want to have a tight budget just because no one’s currently renting. We have to ensure that there’s already income allotted for the monthly amortization. If more than 30% of your cash flow is spent on housing, chances are you will have a difficult time keeping up with the other demands of life.

Now, let’s discuss the next idea.

The total amount of your loan should not exceed 30% of your household income.

To differentiate this from the first idea, this means that regardless of what loans you have, the total amount should not be more than 30% of your income. In addition to your housing loan, these may include the money you loaned for your car, the credit you swiped for your phone, or the funds you borrowed due to an emergency.

For example, you’re paying for a car loan worth PHP 12,000 a month and for a new phone worth PHP 3,000 a month. And like the sample above, the total household income is PHP 120,000, which means 30% of it is PHP 36,000. Since you already have a loan amounting to PHP 15,000, the monthly amortization for your house should not be more than PHP 21,000.

Car Loan = PHP 12,000
Phone Payment = PHP 3,000
Total Existing Loan = PHP 15,000

Total Income = PHP 120,000
Maximum Amount for Loans = PHP 36,000

PHP 36,000 subtracted by PHP 15,000 = PHP 21,000
Maximum Monthly Amortization = PHP 21,000

As mentioned, borrowing too much can lead to several negative effects. Because loans will not just go away if you get sick or if you’re on vacation. You need to pay as long as the credit is due. Because if not, this may lead to emotional stress, late fees, loss of assets, legal action, and even damaged relationships if you borrow from a friend.

Now, to illustrate this, let’s say 60% of your salary goes to loans. It’s like working for 5 days and getting paid for only 2 days every time. You’re having a hard time keeping up with your expenses anymore. And if you find yourself in a position like this, there’s a greater possibility that you feel burned out or trapped. You lost hope for the future, as if you’re in a never-ending rat race and it’s very difficult to progress. And all of this is because of too many loans. That’s why the total amount of loans should only be up to 30% of your income. I understand that there are instances where we have no choice but to borrow. So if you’re already stuck in this kind of situation, let’s talk about this last main idea.

Your financial situation can be improved.

While this doesn’t exactly answer how much you should borrow, it’s a great reminder for everyone, especially those who (1) just realize that they can’t afford their dream home yet or (2) are already stuck in a situation where too much of their income just goes straight to paying loans.

If you’re either 1 or 2, here are two (2) simple steps you can take.

1. Grow your income
   I understand that the initial response if the salary is not enough is to cut off some of your expenses, like groceries and transportation. But there’s another point of view one can consider, which is growing your income.
   
   Let’s say your income is PHP 90,000 and your loans are PHP 50,000. That’s already more than half of your salary. If you can grow your income to PHP 125,000, then the PHP 50,000 won’t take up half of your salary anymore. It’s easier said than done, but there are now different opportunities out there that you can explore to help you with this step.
2. Pay off existing debts
   Whether you’ve already grown your income or you've cut off some of your other expenses, make sure to pay off your existing debts first before taking on a new one.
   
   This also means that if you’re already eyeing a house but your loans would go beyond the 30% mark, then you have to postpone buying it in the meantime. Others may already take it, but believe that something like that or even better will come again. Prioritize paying off your existing loans first so that, when the time comes, buying a house won’t be a financial burden for you. And you’re in a better position to own a home.

And with that, I hope these ideas here have given you a much better perspective on the amount you should borrow and what it takes to buy a home. Home ownership is something to be grateful for, and the last thing I’d want for you is for it to become the very reason for any financial difficulty. Remember that your home is just one part of the bigger equation called life.