When you’re considering buying a home, especially if you’re doing so for the first time, you might not realise just how much financial consideration should go into that decision. You obviously know that buying a home is extremely expensive probably among the largest purchases you will ever make and for that reason, even relatively small overages in your budget can be extremely costly.
With that in mind, you really have to crunch the numbers before you even start shopping to fully understand exactly how much you can afford to spend. This should be based on a number factors, including your total household annual income, how much you’ve saved for your deposit, and what you tend to spend in a given month, Finder advises. Once you know all that information, you can at least begin to estimate what you can afford in terms of housing, but it’s also important to know roughly what interest rate you can obtain based on your credit standing.
Traditionally, you would be making a deposit of 20% or so, but that’s not really a requirement and many lenders will let you come in under that number. However, you need to understand that a larger deposit means you will also pay less in interest over the life of the loan and, in doing so, reduce your monthly payments at least somewhat.
A simple formula
As a general rule, experts say you shouldn’t spend any more than 25-30% of your monthly income on your housing expenses, according to NerdWallet. If, for instance, you make about $6,000 per month, the absolute maximum you should be spending on your home loan payments is about $1,800, but ideally the number will be lower than that. You will, however, have to take into account other costs of homeownership, such as higher utility bills than what you pay if you currently live in an apartment, increasing insurance costs and so on.
But once you have that rough estimate in place, it becomes easier to understand what it really costs to own a home. Once you know that, you can look at various home prices to see if you like anything in your recommended price range. If not, you might need to find ways to improve your income or make a larger deposit to bring ongoing ownership costs down.
Other financial issues to account for
Just as you should aim to average about 28% of your current income going toward your mortgage, it’s also a good idea to keep your debt balances relatively low going forward, so that your total debt load is a maximum of 36% of your income. Homelight notes that this not only ensures you have a strong credit rating, but it also means your other debt-related costs (such as auto loans or credit card bills) aren’t breaking your back financially.
Again, suppose your current income is $6,000 per month. If 28% of that ($1,800) goes to mortgage payments, that means you only have another 8% of your income ($480) you should be devoting to debt payments. This might require you to do more to pay down outstanding balances before you even enter the homebuying process, but that work will really pay off down the road.
When you’re looking for the right home at the right price point, it helps to have an expert real estate agent on your side. At Ray White Surfers Paradise, we want to guide you through the purchase process as quickly and effectively as possible, providing all the advice you need at every turn. Get in touch with us today to learn more about what we can do for you.