Buying Real Estate Part 4 - Working Out How Much You Can Afford
So you're ready to buy a home, but how much can you afford to borrow & pay back?
How to Work Out Your Budget Based on Income and Expenses
- By working out a budget, you will able to track how much money you have coming in, where how it is being spent and where you may need to cut back to help save for a deposit or allocate towards your home loan repayments. Essentially, it should paint a pretty clear picture of what you can afford to buy.
- When doing a budget, it is best worked out on a monthly basis by starting with your income after tax then any share dividends, term deposits or any other forms of income you may receive.
- Next work out your monthly expenses, which should include things like food and entertainment, car expenses, health and well being, clothing and utilities, credit card repayments, personal loans, school fees, holidays etc. It is easier to calculate your monthly expenditure if you divide it into fixed and variable expenses. Fixed expenses are those that stay more or less the same every month. It comprises of your monthly debt repayments (such as, home loan payments and credit cards etc.) along with your other fixed day-to-day expenditure. Variable expenses are those that vary from one month to another. It includes your grocery bills, medical bills along with the money you spend in entertainment. This is an important category that requires careful monitoring so that you can prioritise and reduce your expenses if necessary.
- Once tallied up in a spreadsheet, you should have a pretty clear picture of your spending habits and financial position. Make sure you are completely honest, it is risky to over stretch yourself when it comes to borrowing money, especially if you are not willing to cut out a few luxuries you may have become accustomed to.
- If your income is looking healthy but you have a few credit cards that need paying off or a personal loan, it may be a good time to consolidate your debts, which can save you a fortune in interest. Speak to an LJ Hooker Home Loans Specialist, your bank, home loan broker or financial advisor about consolidating these debts with your home loan. Any existing debt you have is likely to reduce the amount of money you can borrow to buy your new home, however you will save money on interest repayments.
- Typically, financial advisors and institutions will recommend that your home loan repayments do not exceed 30 percent of your before-tax income. Check out LJ Hooker’s borrowing calculator to get an idea as to how much you will be able to borrow. LJ Hooker’s How Much Can I Borrow calculator is another great way to see what your repayments will be depending on the amount borrowed.
Lifestyle Factors to Consider When Doing a Budget
- A good budget is made to last throughout the years. It has to be flexible as your circumstances and spending changes over time so it is wise to review your budget periodically. Monitoring it every month and perhaps at the start of each new financial year is the best way to make alterations where necessary and ensure you stay on track.
- On paper you might be entitled to borrow a certain amount of money, however it is important to consider the future and any changing circumstances which may affect your ability to service your home loan. Living in your dream home will not make you happy if you cannot afford to pay for it.
- It is a good idea to plan for the unexpected by having a savings fund as part of your budget expenses. Ideally, this should be an automatic contribution you make each month. Make sure the funds are accumulating in a high interest bearing account.
- It is important to think about what the years ahead may hold and how much they will impact on your financial position, which in turn may affect your ability to service your home loan. Retirement, job stability, career change or the hopes of starting a family are just some of the factors that can have a substantial impact on your financial position. Forward planning can lessen the impact the loss of income or extra expenses will have on your home loan commitments.
Hidden Costs of Buying a Property
- The repayment of a home loan is not the only expense that you will have when buying a property. When considering your budget and loan options be sure to allow enough money to cover more than just the purchase price.
- Some of the extra fees you can expect to pay are government charges, including land transfer registration fees and taxes. These costs are a mixture of flat fees and variable charges that change depending on the price of the property. First home buyers may be exempt from some of these fees.
- Stamp Duty varies from state to state and can add a significant amount to the property you are purchasing. For more information regarding stamp duty in your state refer to your state government’s website or your home loan provider may also be able to assist.
- Legal fees for the transfer of title of the property, commonly referred to as conveyancing is another expense you are likely to incur. This fee can vary depending on the price of the property and who you use. Some conveyancers will offer a flat rate, so be sure to ask for a quote first.
- Home loan insurance is a requirement of nearly all lenders if you are providing less than 20 percent deposit or borrowing more than 80 percent of what the lender considers to be the value of the property. Home loan insurance protects the lender in the event that you are unable to repay your loan and the value of the loan is more than what the lender receives if they have to sell your property.
- Home and contents insurance plus life and income insurance are also vital. Home loan insurance only covers the lender, not the purchaser, which means it is your responsibility to insure yourself against a loss of income or property damage.
- When you apply for a home loan, an application fee is usually charged by the lender to cover the initial costs of processing and setting up your home loan. Fees can vary from lender to lender and may also cover additional costs such as property valuations.
- Building and pest inspections reports are important to carry out prior to buying a property. These reports can cost anywhere from $300 to upwards of $1000. A strata search is another important report to obtain for apartment buyers and could set you back around $100.
LJ Hooker Home Loans can help you plan your budget and what you can afford. Click here for more or call 1300 515 200