Article by: Mike Dunkerley mike.dunkerley@thegpg.com Published: 09/02/2007

from

The Global Property Group Ltd

No matter if you are buying a property in the UK or overseas you can tell in a matter of seconds if you can afford it. You can work it out faster than the professionals by just using the three simple steps explained below. Don’t worry if you find the thought of mathematics daunting because there is also a simple table set out below that lets you see at a glance.

This method works for ‘interest only’ calculations and for ‘interest and capital repayment’ mortgages where the capital repayments are built into the ‘interest’ figure. For example an interest only mortgage at 3% may become a capital repayment mortgage at 5%.

The first thing to do is to decide how much ‘net’ income the property will bring in as rent.

If you are buying the property to rent it out then this has to be the income left over after you have deducted all the expenses such as fees to letting agents, cost of repairs, tax, insurance and anything else from the rent you expect to get.

If you are buying the property for yourself then the ‘income’ of the property is how much you can afford to pay out of our own pocket after taking into account the costs associated with owning the property.

If you are renting out holiday property overseas you will probably have a short season of maybe 3 months or 90 days concentrated around school holidays times. If you achieve £500 a week, this will gross out at £6,000; take off costs of £2,000 and you are left with £4,000 net. It might be a lot more but you have to work harder to find customers ‘out of season’.

If you are buying property to let in the UK or property to let in capital city in another European country where there is good demand from business people, then you might get long term tenants paying £750 a month or £9,000 a year. Take off your costs and you may be left with £7,000 net.

All you have to do is slot in your own figures and be honest and realistic about them.

The second thing you have to do is find out the rate of interest you will be charged on the money you borrow.

Interest rates change and also there are risks of the exchange rate between currencies changing as well. At the moment in the Euro zone interest rates are around 2%; in the UK they are around 5%; in the USA they are moving up towards 5%. This means that you can get a mortgage at anywhere from 3% to 6% depending where you borrow the money.

The third thing is the Maths

This is the easy part. It is just working a simple calculation in reverse.

Take your net rental income and divide it by the rate of interest you will be paying. If your net annual rent is £4,000 and the interest rate is 3% then the answer is £1333 (for 1%). Now multiply £1333 up by 100 to find out how much mortgage your rent will pay for; answer £133,300.

However, if the rate of interest is 6% then £4,000 divided by 6% = £666. Your rental will only support a mortgage of £66,666.

This is why small changes in interest rates can have a big impact on the capital values of many investments and the investment decisions of many people.

Conclusion – The Three Steps

1) Take your net rental income

2) and divide it by the rate of interest you are going to pay

3) and multiply the answer by 100.

This will tell you how much you can afford or how much of your mortgage the rents will pay and how much you have to pay out of your own pocket.

READY RECKONER

The mortgages that Rental Income will support at various interest rates.

(Rounded up)

RENT 3% Int 4% Int 5% Int 6% Int

1,000 33,333 25,000 20,000 16,666

2,000 66,666 50,000 40,000 33,333

3,000 100,000 75,000 60,000 50,000

4,000 133,333 100,000 80,000 66,666

5,000 166,666 125,000 100,000 83,333

6,000 200,000 150,000 120,000 100,000

7,000 233,333 175,000 140,000 110,666

8,000 266,666 200,000 160,000 133,333

9,000 300,000 225,000 180,000 150,000

10,000 333,333 250,000 200,000 166,666

Article Link: http://www.thegpg.com/overseas-property-news/property-news.cfm?id=13

Please contact the author at mike.dunkerley@thegpg.com for more information.