Australians love to fear-monger about housing affordability. The key question when buying a house is: just how much can you really afford? Understanding your limits can and will help you to focus on searching for properties that fall within the correct price range. Understanding how much house you can afford requires careful planning. This article is designed to help you determine your spending-power and also clarify some of the hidden costs involved in buying a house.
1. Determining how much you can afford
Assess Your Income And Expenses
Most people’s buying power is determined by how much they can afford to loan. The first step to determining how much you can borrow is assessing your total monthly income and, if applicable, the after-tax income of your partner or spouse. Following this, estimate your total monthly expenditure (not including rent if you are planning on buying a house). Expenditure should include existing debts, school-fees, shopping expenses, petrol expenses, phone bills etc. Subtract your expenditure from your income and you will receive a rough estimate of how much you can afford to spend on mortgage repayments each month. Be sure to also allow a monetary buffer for any unforeseen circumstantial changes.
What Is Your Loan To Value Ratio (LVR)?
Banks and lenders will use a loan to value ratio to determine your suitability for a loan. This is calculated by dividing your loan amount by the cost or assessed value of your property. Simply put, the higher the loan to value ratio, the greater the risk that they will not be repaid if you default on your loan and they are forced to sell the property. An LVR of 80% (or above) is widely understood to be the point at which the cost of your home-loan will increase. A high LVR will also require the borrower to take out Lender’s Mortgage Insurance. This insurance protects your provider against any loss incurred if you default on repayments. The fee is dependent on the amount you are borrowing. Online LMI calculators are useful tools for determining how much it will cost to take out lender’s mortgage insurance.
Lending criteria has tightened of late. In order to secure a home loan, most providers will advise that you make a deposit of (at least) 20% of the property’s total value. For a house worth $400,000, this means saving for an upfront down-payment of $80,000. Offering your lender a significant deposit will not only give you a better chance of having your loan approved, but it will also save you money in insurance costs and interest! Most lenders also require a loan application fee, which covers the processing costs of your home loan. This will generally set you back $500, before your application is approved.
2. Be realistic
Committing to a mortgage should not mean compromising on lifestyle. Spending any more than 30% of your pre-tax income on a mortgage might tip you into the ‘mortgage stress’ category, wherein families struggle to meet ongoing expenses such as utility bills. Before borrowing the maximum amount, consider the aspects of your life that you are willing to sacrifice. If you still want to eat out and take your family on a holiday, it might be useful to opt for a smaller loan.
3. Upfront and unexpected costs
Securing a house involves more than just paying the deposit. When buying a house, homebuyers are surprised by the hidden and unexpected costs of closing on a property. Some of them (and not limited to) include:
Before buying any property, it is advisable to engage a professional pest and building inspector. This ensures the buyer against any structural issues the home has encountered and may save you a world of inconvenience down the track. On average, this service will cost $600.
Conveyancing is the transfer of a property title from one individual to another. Often, this process involves engaging a conveyancing expert. The price of this service can range in cost between $600 and $2,500. This cost will usually include transfer fees. ‘Do it yourself’ conveyancing kits are also available but will deem you legally accountable for any mistakes made.
Mortgage Registration Fee
Another niggly upfront cost is the ‘mortgage registration fee’. This process registers your property as the material security of your loan. Typically, this fee amounts to $150.
Ultimately, how much house you can afford depends on your financial situation and preferences. There are a lot of factors that influence this decision, which is why it’s important to evaluate your finances and the costs of buying a house before you go shopping for one.
Whatever you are looking for in a new home, make sure to speak to our independent consultants. They are here to help you 7 days a week and assist you with all of your queries regarding the new home building process or even investment opportunities. Call them on 1800 184 284, or book a call online.