How much house can I truly afford?

How much house can I truly afford?

When deciding on a price bracket, most buyers will find out how large of a home loan a bank will offer and use that as their house hunting budget. But is this the most effective way of setting a budget, and if not, what should we be doing instead?

Although this is not entirely a bad strategy, buyers should also ask themselves how much they ideally want to be spending on a home each month instead of asking what is the maximum they can afford (especially now that interest rates are as high as they are).

It is relatively simple to find out how much you can qualify for in home finance. Buyers can do so by using an online bond calculator or by getting a pre-approval certificate.

However, he notes that it is often much trickier to decide how much you ideally want to spend on a home each month, which is why many tend to overlook this step. The bank will only consider your fixed monthly expenses, but they don't really take into consideration your nice-to-haves, like the takeaway coffees you like to buy on the way to work or the spontaneous weekend away that happens every other month or so. These small lifestyle expenses can add up, so it is important to think about this carefully before taking out the maximum line of credit that is offered to you.

Of course, it is acknowledged that buyers might be happy to cut back on their expenses if it means owning the home of their dreams, but it is also noted that it is important to realise that they are making these kinds of sacrifices ahead of time, otherwise it can be a bitter pill to swallow when there is no money left for life's small luxuries once the debit orders go off.

Here are some key learnings.

1. Location, location, location! Also known as the Three L's:

There are three micro locations that define the actual location of a property on a macro level. If the property you want to purchase is in an estate for example, you may want to find out what area of the estate it sits in and what that actual area provides, such as a good sea view, etc.

2. Financial stability is important:

Get your credit card payments and debts in order.

3. Budget:

Establish a realistic budget to determine your affordability. Create a budget and try to stick to it so that you can enjoy the process and not put yourself under too much pressure.

4. Find a trustworthy real estate agent:

This is the person that will assist in picking out your potential home and exploring your new neighbourhood and is also responsible for scheduling tours and negotiating important contracts on your behalf. Ensure that this is someone you trust, to have your best interests at heart.

5. Get approved:

Get a pre-approval letter before you start shopping! This will help you have realistic expectations on what you can afford.

6. Be mindful of transfer and closing costs:

First time buyers usually tend not to factor these costs in, and it comes as a huge surprise at the end. Doing your homework is a very vital part of house hunting.

Becoming a first-time homeowner can be an overwhelming experience and requires careful consideration of several factors. With some expert advice, first-time home buyers can make an informed decision and successfully unlock the door to their dream home. 

To work out how much a buyer can truly afford, look at the following tips:

• Calculate your debt-to-income ratio to see how much of your income is already committed to debt payments. The money leftover is now your base amount to work out how much you want to pay on a home loan.
• Top tip: are there any debts you could pay off quickly to free up more income?
• Work out how much money you typically spend on lifestyle expenses (consider things like birthday presents, entertainment costs, hair, and beauty expenses, etc.) These amounts vary each month, which is why it can be tricky to work out a budget for these items.
• Consider your priorities. For example, if travelling is important to you, then it might bring you more joy to compromise on the size of your home than to compromise on your ability to afford getaways.
• If all else fails and you're not sure where to start, a common guideline is that your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (including housing costs) should not exceed 36% of your gross monthly income.

A home loan is a long-term financial commitment, so you want to be sure that you are comfortable with the repayment amount before you sign on the dotted line. It might require some sacrifices or trade-offs to afford your dream home, but it can also bring greater financial freedom in the long-term for those who diligently keep up with their repayments and allow house prices appreciation to work in their favour. 

Extract from Property 24