What kind of house can I buy with my salary?
If you're planning to buy a home, there's one crucial question to consider: "What kind of house can I purchase with my salary?"
The answer to this question is crucial for determining your budget and what type of properties you can afford. Your salary isn't the only factor that determines your purchasing power; your own savings and the potential equity from your current home (if you own one) also play a role. Typically, your salary sets the maximum mortgage amount you can obtain. Here is detailed information about calculating the maximum loan amount based on your income.
Calculation Based on Gross Annual Income
Your gross annual income is usually the primary factor for determining your maximum mortgage amount. You can find your annual gross income on your year-end statement or by adding up the gross income on your paychecks. The maximum mortgage typically doesn't exceed 4.5 times your gross annual income. For example, if your gross annual income is €40,000, your maximum mortgage may be up to €180,000. However, your gross income might not always be the primary factor. If you have existing loans or are paying partner alimony, then your effective income will be considered when calculating the maximum mortgage. In cases where alimony is applicable, the gross amount will be deducted from your gross effective income. If you have a partner with an income, it's typically counted as 90% of the amount from 2021.
Incomes Included in Gross Annual Income:
- Gross salary and vacation allowance
- Overtime compensation
- Irregularity payments
- Commissions
- Year-end bonuses
- Thirteenth-month bonuses
- Partner alimony
- Social benefits
- Flexible income
Living Costs Percentage: A Percentage of Effective Income
When asking, "What kind of house can I buy with my salary?" you need to consider the housing costs ratio, known as the "woonquote" in the Netherlands. This is the maximum allowable housing expense as a percentage of your effective annual income. The housing costs ratio is not solely dependent on your salary; it also considers your age and the reference interest rate. If you have a higher income and the reference interest rate is higher, you'll be able to afford a higher housing cost. In these situations, you may be eligible for additional tax benefits. The National Institute for Family Finance Information (Nibud) determines the housing costs ratio each year.
Several factors that can affect the housing cost ratio include:
- Reference interest rate
- Partner alimony
- Ground lease (erfpacht in Dutch)
Reference Interest Rate:
When calculating the maximum mortgage based on your salary, you need to consider the reference interest rate. This rate may differ from the actual mortgage interest rate, depending on the length of the fixed-rate period. The actual mortgage rate will be used as the reference interest rate if the fixed-rate period is ten years or longer. For fixed-rate periods of less than ten years, a reference interest rate is used for calculations.
The Dutch Authority for Financial Markets (AFM) determines the reference interest rate regularly. For example, in the first quarter of 2021, AFM set the reference interest rate at 5%. The purpose of using a reference interest rate for shorter fixed-rate periods is to prevent consumers from facing financial difficulties due to rising interest rates once their fixed-rate period expires. In most cases, the maximum mortgage is the highest when you choose a ten-year fixed-rate period because the reference interest rate is generally lower in those cases.
So, your question about "What kind of house can I buy with my salary?" depends on your gross annual income, effective annual income, the reference interest rate, and other factors like partner alimony and ground lease. To get accurate results for your specific situation, it's advisable to consult with a financial advisor or mortgage expert. Amstelland Makelaars collaborates with a professional mortgage advisory firm, and they can help you find the right mortgage that suits your financial situation and buying needs.
