Can You Afford to Buy a House?

Posted on June 3 · Comments

Buying a house and paying off several hundred thousand dollars over the course of the next 30 years is a huge commitment. Yet many of us dive right in without a second thought as to whether we can afford it.

While a bank will assess your ability to repay your debt, they have a general “one-size-fits-all” criteria that may not fit your situation.

Lenders will look at your gross income (or sometimes the income left over after expenses) to assess whether you can repay your loan. Generally, the upper limit for minimum repayments is around 30-35% of your pre-tax income.

Before even seeing a lender, you need to assess for yourself whether you can afford to buy a home and how much you can afford to borrow. Do you meet the lenders requirements? What amount do you feel comfortable paying off? (Lenders sometimes offer more than you think you can repay – before the credit crunch, anyway!)

Taking the time to realistically calculate for yourself the loan repayments that you can pay can save years of potential financial pain.

1. Draw up a budget

The only way that you can work out how much you can repay each month is to draw up a budget. How much do you have left over for the mortgage once your expenses are paid for?

Be realistic about the expenses that you include in your budget. Think about holidays and entertainment. You don’t want life to stop once you buy a house.

Consider extra costs of owning a home

Include in your budget the other costs of owning your home.

Rates
Body Corporate Fees
Insurance
Maintenance – think both general maintenance like lawn mowing or changing the tap washes, and emergency maintenance like hot water heaters blowing up.
Will you be travelling further to work or further to the shops? Factor in extra fuel costs.
Moving Costs
Setting up costs – you might want to put in new curtains or install a dishwasher, or you may need some new furniture to fit in the new house.
Renovations

2. Factor in other scenarios

Will you still be able to make the repayments on your mortgage when the interest rates go up?

Will you still be able to make the repayments if you have a baby?

Can you make the repayments on one income? What if one partner loses their job?

3. Calculate repayments

You’ve done your budget, and you know how much you can repay each month. Use an online calculator to punch in your repayment figure, the current interest rate and the loan term. This is how much you can afford to borrow.

Things to consider:

Is your repayment amount 30% or less of your pre-tax income?
Make some adjustments to the interest rate. Can you make the repayments if the interest goes up?
Make some adjustments to your repayment amount and see how many years you will save if you pay a few extra dollars a month, or if you pay fortnightly.
The bigger your deposit, the higher the purchase price.

Get Pre-approval and secure your finance before committing to purchasing a house.