When buying property, how much can I afford to spend?

When you enter the house/property buying market, it is important to understand how much you can responsibly afford to spend. This is true for first home buyers, and those that have been in the property market before.

How much you can afford to spend has two parts to it which we have explained further below – and searched the web for the best tools to assist you.
1. How much can I afford ongoing – what size home loan can your income deal with; what is your borrowing power.
2. How much can I afford to outlay upfront – how much “savings” do you have to go towards the purchase price of the property.

1. How much can I afford ongoing?
Step 1 – know your finances, that is your incomings (income) and outgoings (expenses). Your Money Position may assist with this.

Step 2 – Know what sort of home loan suits your needs. As discussed here different types of home loans, there are different types of home loans depending on your circumstances and risk appetite.

Step 3 – work out how much you can borrow. There are plenty of great calculators out there that can help you with this. I found NAB calculators to be the easiest to use.

Step 4 – With this in mind, I would take note of the monthly repayments required – and add a buffer to these to allow for interest rates to rise (we haven’t been in such a low  interest rate environment for ~50 years). Use the repayments calculated and shown in step #3, otherwise CBA has a good tool here.

Separate from home loan repayments there are other costs to be aware of, including home, building and contents insurance; Utilities (water, electricity and gas) and Council Rates.

2. How much can I afford to outlay upfront
In general, under most circumstances you will need ~25-30% of the purchase price of the property upfront; 20% being the deposit if want to avoid an additional cost of lender’s mortgage insurance (LMI) and up to 10% “other” upfront costs.

This means, if you are looking buying a home for $1m, around $250k in savings (25% x $1m) would be beneficial to avoid LMI and cover other upfront costs. Or alternatively, if you have $100k in savings, it may be good to be looking at homes in the $400k price range ($100k / 25%).

These other costs vary greatly by state or territory and can be reduced if a first home owner. Let’s break these down…
The deposit is usually the biggest cost and having a deposit of 20% of the purchase price (or value of the property) or more, is ideal. The larger your deposit, the lower your loan to value ratio (LVR) which is your loan divided by purchase price.

For example if you buy a $1m home, you have $0.2m for your deposit and therefore need to borrow $0.8m: Your LVR would be $0.8m loan / $1.0 value = 80%.

LVRs of greater than 80% typically require lender’s mortgage insurance (LMI) which is an additional cost to you. This is covered below in other costs.

Other upfront costs beyond the deposit to consider include:

• Stamp duty – this is a large cost and varies from state to state (check out your state’s government website) and typically needs to be paid within 30 days of settlement. If you are a first home owner you may get a concession (check out First Home Owner Grant). Check out your local state website.
• Transfer fee – this covers the cost of transferring the title of the property. This again varies depending on where the property located and can be as little as $137 (in the Northern Territory for a $400,000 home) to $2,901 in South Australia.
• Mortgage registration fee – another fee which varies depending on your state, but not too significant – a couple hundred dollars typically
• Legal and conveyancing fees – this is a fee for a licensed conveyancer/lawyer to do and check all your paperwork. They review your contract, check the title and draft the settlement documents.
• Lenders Mortgage Insurance or LMI – as mentioned above, if your deposit is below 20% value of home, you will need LMI which is a one off fee around 1-3% of value of loan
• Building and pest inspections – this should be done before exchanging contracts to make sure there is northing structurally wrong with the home and that it isn’t housing any pests
• Moving costs – depends on how many boxes you have and how far you’re moving
• costs associated with selling your old home

Two great tools to assist –
(1) Commbank’s upfront cost calculator
(2) REA’s home loan calculator