Many buyers, especially first home buyers, ask themselves: how much should I spend on a house?
Assuming you’re borrowing money to buy your house, the answer depends on:
- How much your lender will allow you to borrow (seek pre-approval to ascertain this), and
- How much you are willing to pay in loan repayments
As a rough guide, your total loan repayments should be no more than 40 percent of your total income. To get a better idea of what you should spend on a house, sit down and budget the difference between how much you earn and how much you spend each month – what’s leftover for home loan repayments? Don’t compromise your standard of living by getting yourself into too much debt!
Why is it important to spend the right amount on a home?
Spending the right amount on a home is of utmost importance for various reasons. Firstly, it ensures financial stability by allowing you to afford your mortgage payments without straining your budget. By spending within your means, you can maintain a healthy financial outlook and avoid excessive debt or financial stress. Moreover, it ensures long-term affordability, as you can comfortably meet your housing expenses, including mortgage payments, property taxes, insurance, and maintenance costs, without sacrificing other essential expenditures. This balanced approach to spending on a home prevents overextension, where a large portion of your income is dedicated solely to housing costs, giving you the freedom to allocate funds to other crucial financial goals, such as retirement savings, education, or emergency funds. Additionally, spending the right amount on a home can prove to be a wise investment. It increases the likelihood of gaining equity and potential appreciation over time, allowing you to build wealth and secure your financial future.
Factors that affect affordability in home buying
Determining your affordability goes beyond just looking at the price tag of a property. It requires a comprehensive assessment of your financial situation, considering multiple key factors that impact your purchasing power.
- Income: Your income level plays a crucial role in determining how much you can afford to pay for a home. A higher income provides greater financial flexibility and increases your borrowing power.
- Debt and Expenses: Existing debt obligations, such as student loans, credit card debt, and car loans, can impact how much you can afford for a home. Lenders consider your debt-to-income ratio when determining loan eligibility.
- Credit Score: Your credit score affects the interest rate you can secure on a mortgage. A higher credit score typically results in more favorable interest rates, allowing you to afford a larger loan amount.
- Down Payment: The size of your down payment affects both the loan amount and monthly mortgage payments. A larger down payment reduces the loan principal and may lower interest rates, making home ownership more affordable.
- Mortgage Interest Rates: Fluctuating interest rates impact the affordability of a home. Higher rates increase monthly mortgage payments, potentially limiting the price range of homes you can comfortably afford.
- Property Taxes and Insurance: Property taxes and insurance costs vary depending on the location and property type. These expenses should be factored into your affordability calculations, as they contribute to your overall housing costs.
- Future Financial Goals: Consider your long-term financial goals, such as saving for retirement, education, or other investments. Balancing your home affordability with these goals is essential for maintaining overall financial stability.
One way to cut down the cost of your purchase is to decide exactly which costly features of a home you do and don’t want. Consider how important, or unimportant, features such as the following are to you:
- Size. Many first home buyers are attracted by large family homes that remind them of the homes they grew up in. However, large homes are expensive, and it’s important to consider how much space you will actually need – do you have (or are planning to have) a large family, or will the home only house one or two people? Are you willing to sacrifice house size in return for the smaller energy and maintenance bills associated with a smaller home?
- Outdoor space. For some people, a big backyard is a must. For others, a large lawn and leafy gardens are just other sources of maintenance costs. Consider where you stand in the outdoor space.
- Luxuries. Pools and spas look great at home opens, but consider whether they’ll be an unnecessary extra cost or a part of your everyday lifestyle.
- Location. Proximity to good schools, parks, and shopping centres can often drive up the asking price of a home. Decide on which location is most suited to your lifestyle.
By deciding which costly features of a home aren’t important to you and buying according to those priorities, you’ll avoid the temptation of unnecessary features that will have you paying more. You’ll also save yourself a lot of time because you’ll be able to narrow down your property search to fewer properties.
In summary, to find out how much you should spend on a house, get your home loan pre-approved. Then, determine which costly features are and aren’t important to you and decide how much you are willing to pay in loan repayments.
