There are two types of home buyer. Which one are you?
People who ask this question fall into two categories. There are the ones who are asking how they can afford ANY house, then there are the ones who are asking how they can afford a PARTICULAR house.
Lets start with the first group.
In order to be in a position to buy a house, you need to have a few things. First of all, you need a regular income that allows you to save money. Loan approval amounts are normally calculated as a percentage of your income, and allowing for any additional debts you might have, such as credit cards, personal loans and car payments. Every lender will have a slightly different formula to calculate the maximum you can lend, but essentially, the more you earn (and the less outstanding debts you already have), the more you will be able to borrow.
As well as a regular income, you need to have a deposit for the mortgage – this shows the lender that not only do you have the income to repay the loan, but you also have a proven ability to manage your spending and save the surplus. There is also an additional benefit for you if you can save more than twenty percent of the loan amount (this percentage can also vary from lender to lender). You will avoid having to pay lenders mortgage insurance (LMI).
LMI is an insurance policy that covers the lender if you default on the loan, they sell the property, and the sale amount falls short of covering the remaining loan balance. Essentially it almost guarantees that they won’t be out of pocket even if you do default. As house prices are unlikely to drop by more than twenty percent, having a twenty percent deposit is viewed as providing enough security over the loan. However, if you don’t have that amount, you pay for the insurance premiums – and they aren’t cheap! How much? The amount you are looking to borrow, the amount you have saved and the specific policy of the lender will determine the exact amount, but it could run into the thousands. Understand that this insurance isn’t protecting you in the event of injury, job loss or death, that’s Mortgage Protection Insurance. LMI simply ensures that the lender gets their money back. Now you can see why a deposit is vital.
If you have an income and some savings, it’s time to go shopping! Not for a house just yet. First you should shop for your loan with different lenders, because the varied criteria between lenders will mean that you could get approval for significantly different maximum amounts from one lender to the next. At this point, you may want to consult an independent adviser, because getting approval for an amount doesn’t mean you should automatically borrow up to that amount. Consider your own circumstances and the amount of sacrifice you are willing to make (more money on repayments means less money elsewhere), before simply signing on the dotted line.
Now you are ready to start looking at properties in earnest. And here’s where the second group of people (the ones wanting that special property) will join us.
Knowing how much you can borrow will give you a clear understanding of what sort of property you can afford, and unless you are willing to wait until you’ve saved more or have a better-paying job, spending a lot of effort looking at houses above (or even right up to) your limit will largely be an exercise in futility. This comes back to borrowing what you can repay, not what the lender may loan you. There’s no point getting the house of your dreams if it means you have sacrificed the rest of your lifestyle to achieve it, or worse, that you default on the repayments and lose the house. You also need to allow for the incidental expenses of buying a property (things like stamp duty, lawyers and accountants fees, building inspections), because they run into the thousands as well. Then there are the ‘moving in’ expenses like telephone, and electricity. It all adds up.
So, in answer to the question, ‘How can I afford to buy a house?’
- Take the time to create a personal budget (if you don’t already have one) in order to set aside savings.
- Have a look at the real estate market to get an idea of how much the sort of property you’re looking for costs.
- Set a goal of saving a deposit of twenty percent of the estimated purchase price.
- Once you have the deposit, consult a number of lenders (and seek independent advice) to see what you can borrow.
- Ensure that you aren’t going to over-invest and put yourself at risk of defaulting.
- Look at Mortgage Protection Insurance (in case something happens to you).
Following these tips will put you in the best position to secure the home of your dreams – without having it turn into a nightmare down the track!
By Troy MacMillan