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.