Buying your own property can be the culmination of a dream. However, the flip-side is the nightmare of repossession if you can’t keep up repayments. That’s why it’s so important that you work out what you can afford to spend.
Step 1: How much can I borrow?
You should contact several lenders and ask them how much they’re willing to lend. This is normally based on an income-multiplier calculation, and this calculation differs by bank. Indeed, the recent sub-prime lending concerns may mean that banks will become more conservative.
Step 2: How much will my mortgage payments be?
When you speak to the lenders, it’s worth asking for a quick quote. This is not binding but will help you assess how competitive they are and what your monthly repayments will be.
Step 3: How much spare savings can I put into the purchase?
Banks often ask for at least 5% of the purchase price to be paid upfront, so for a $100,000 property, they’d want you to pay a $5,000 deposit.
Note: Some banks do offer 100% mortgages but with the current economic climate they may become less willing to do so. More importantly, the more you can pay off immediately, the less interest you will have to pay over the duration of the mortgage.
Step 4: Would my finances withstand an unexpected emergency?
We never know what’s around the corner, so it’s prudent to keep enough money back to help you cope with any unexpected emergencies. Financial Planners generally recommend that you keep back at least the equivalent of three months’ salary.
Step 5: What other purchase costs will I incur?
Home-buyers soon discover that there are some additional costs to consider. These include:
– Legal fees. You will require a lawyer and/or estate agent to purchase a property and they don’t usually come cheap.
– Survey fees. You’ve found a place you love. Before you rush in and buy it, however, it’s vital that you get a survey done by a qualified surveyor. Their report will tell you whether there are any structural or other problems with the property. It will give you peace of mind that you are buying into a safe property and a potentially good future investment.
– Stamp duty. Check whether stamp duty applies on the purchase of properties in the area where you live. Stamp duty is a tax that the buyer pays based on the purchase price. For example, if stamp duty is 1% and you buy a house for $100,000, then you’d pay $1,000. Obviously, the higher the purchase price, the more that stamp duty bill is going to be!
Step 6: Have I factored in ongoing post-purchase costs?
Many first time home-buyers neglect to consider the impact of ongoing costs such as local authority taxes, utility costs (such as gas, electricity, etc) and commuting costs.
Okay, so you’ve come through these six steps. You’ve worked out the size of mortgage required, how much the monthly repayments will be, what additional legal, survey and stamp duty fees apply, and whether your ongoing costs will be higher. You’ve also kept some money aside for a rainy day, and have considered what would happen if mortgage rates went up. Phew! The next step is to go out and buy the house. Good luck!