When you're thinking about buying a home, you have a lot to consider. However, the first thing you need to think about is what you can actually afford, based on a variety of factors. These include not only the size of the deposit you have saved up (and will continue growing throughout the process), but also on your credit standing and the impact of various fees on your buying power.
As a general rule, you can estimate how much house you can afford by simply multiplying your current annual salary by three and four, as this will give you at least a rough estimate of the range of prices you can afford, The Street advised. If, for instance, you make $100,000 per year, crunching the numbers in this way will show that you can afford a property priced between $300,000 and $400,000.
However, that doesn't necessarily account for every aspect of your finances. You might also want to consider what your mortgage payments should look like: You can estimate this number based on your monthly income after taxes (in the example of $100,000, that's about $6,125 this year, per the Australian Securities and Investments Commission). Then, deduct how much you spend to pay down your other debts (perhaps another $1,000). That leaves you with $5,125 in income you can spend on other things, including necessities.
The rule of thumb on mortgages is that you should try to keep it around 25% of that other income, so in this scenario, you can afford to spend just under $1,300 on your monthly mortgage payments.
Buying a house that costs hundreds of thousands of dollars requires a sizable deposit, so you will need to figure out how much you want to save, and how long that will take you. NerdWallet notes that a 20% deposit is considered traditional, meaning that you will need to put aside about $80,000, or about 13 months' worth of post-tax income if you make $100,000 per year. To get to that level of savings on a compressed timeline, you will likely have to cut expenses, so it's important to sit down and crunch numbers. Estimate when you want to buy the home — say, in two years — and figure out how much you will need to put aside each month to get there.
One of the best ways to increase your savings is by cutting other debts (because the interest payments mean your dollar doesn't go as far over time. However, it's unrealistic to expect that you will then go through your life entirely debt-free besides your home loan. Money Under 30 notes that when you're trying to account for total affordability and carry manageable debt loads, you should aim to keep the combined cost of your monthly mortgage payments and other balances under 40% of your pre-tax income.
To continue the example of a $100,000 income, that means your total debt servicing should be about $3,300 at the very most. Ideally, it's well below that, but that's the maximum experts believe you can spend and still live comfortably in other aspects of your life.
When you are in the market for your first home purchase in particular, it's important to get as much help as you can to get through the buying process. The experts at Ray White Surfers Paradise have guided countless clients on that journey and we'll give you the confidence and assistance to do the same. Get in touch with us today to learn more about how we can help simplify and de-stress one of the biggest purchases you will ever make.