Buying a home
Calculating what you can afford
Moving house is an exciting time but it isn't a cheap exercise. Before you start looking for your dream home, it's important to work out what you can afford to buy and the costs associated with moving.
Here's what you'll need to consider:
What's your budget?
The maximum house price you can afford will be a combination of the amount you can borrow on a mortgage and the amount of finance you can raise yourself.
Assets
Firstly look at your assets. If you already own a property, you may have equity (the amount you sell your property for compared with the amount still outstanding on your original mortgage that you can put towards your next property). If you have shares or investments, talk to an independent financial advisor about the option of cashing them in.
Liabilities
This is money you owe. Again if you already own a property, it's likely you still owe a balance on the mortgage. This will need to either be settled, or in the case of some types of mortgage, can be transferred to the new property. Look at what existing debts you have such as credit cards and loans as these extra strains on your monthly outgoings will affect how much you can afford to pay back on a mortgage. Finally and most importantly, take into account all the costs associated with moving house. All these fees will have to paid upfront before you move.
How much can I borrow?
Lenders want your business so they will tempt you with attractive mortgage terms, sometimes up to 5 times an individual's net income (although it's more common to offer 3 times an individual's income or 2½ for joint incomes). However tempting this may be, interest rates can rise at any time so you'll need a buffer large enough to accommodate interest rates if they were to rise. Mortgage borrowers have been spoilt for the last number of years with rates as low as 4.25%. But you only have to look at the early 1990s when interest rates reached 15% to see just how high they can go. This will make a significant impact on your monthly mortgage repayments so work out what you can afford to borrow based on the highest historical interest rate.
Think carefully whether you want to borrow the maximum loan available or if you want to borrow less and leave yourself a safety margin in case of a change in circumstances. Interest rates may increase, your income may change or you may simply want to leave yourself with some disposable income. Firstly, work out your monthly outgoings so you can see how much you can afford to repay.
It is important to consider what you can afford rather than just working from multiples of incomes. Of course there are personal circumstances which can affect how much a lender will offer you and on what terms such as your credit worthiness, bankruptcy, your length of employment and contract type – temporary and self-employed applicants for example will be required to provide evidence of income. And there are factors relating to the property itself. For example, the lender's surveyor may value the property lower than the price offered, and not be prepared to lend as much as you were hoping for. This may mean you have to stump up a larger deposit to compensate.
Don't forget there's also the option of fixing or capping your interest rate. Find out more about types of interest.