Assessing affordability for homeownership
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What home can I afford to buy?
Most people dream of owning their own home. For first-time buyers in particular, homeownership is a significant and exhilarating milestone, but it's also a huge financial commitment. So, before you start searching for your forever home, your first move should be to assess your financial situation and the type of property you can afford to buy.
"Affordability is very personal and means different things to different buyers," says Berry Everitt, CEO of the Chas Everitt International property group. "Some buyers will have more disposable income while others will have additional financial obligations or debts to consider. Assessing affordability is an essential starting point, but our advice is always that the best home to buy is the one you can comfortably afford."
Below are the essential steps you should follow on your journey to first-time buyer financial planning:
- Set your budget
This first step is crucial in determining your affordability. Take into account your income, expenses, debts, goals and savings to better understand your current financial situation and what you can comfortably afford to pay towards your mortgage every month. It's important to be honest - and realistic. - Consider extra costs
Setting a budget involves more than just establishing what monthly bond repayments you can afford. Consider the additional costs of purchase and homeownership such as bond registration, transfer duty, attorney fees, maintenance, utilities, repair expenses, levies, property taxes and homeowners insurance. This will give you a more comprehensive and accurate idea of what your monthly costs are likely to be and what you can afford. - Know your credit score
Your credit score is how credit agencies rate your ability to diligently manage your financial responsibilities and pay back debt on time. A good credit score is key as it can improve your chances of being approved for a home loan. The average credit score is around 600, while a good score is between 680 - 766. To boost your credit score you must pay bills on time every month and settle outstanding credit card balances. - Your Repayment-To-Income (RTI) ratio
While banks will conduct their own affordability calculations to determine the home loan amount they can offer applicants, they may not grant a bond where the monthly repayments exceed 30% of the applicant's monthly household income. However, affordability assessments are conducted on a case-by-case basis and this amount may be exceeded if repayment is within an applicant's means.
You can use this affordability calculator from bond originator BetterBond to find out how much you can afford to spend on your new home, based on your income and expenses. - Determine your deposit
The usual deposit requirement is 10% of the asking price of the home, but the bigger the deposit, the less you will need to borrow. This will reduce your monthly bond repayments, lower the total amount of interest payable over the life of the loan, and put you in a better position to deal with any future interest rate increases. Saving a substantial deposit also demonstrates to lenders that you are serious about homeownership and a good risk, since you are willing to put your own money into your home. - Investigate home loan options
Do your homework and see which lenders offer you the best interest rates and fees for home loans. Because financial institutions and banks have different lending criteria, it's essential that you compare costs to find the best deal possible. You can also use the services of a bond originator like BetterBond to get a better interest rate, handle negotiations with banks and increase your chance of bond approval. - Get pre-qualified
Home loan pre-qualification helps limit disappointment by giving you an accurate measure of your purchasing power so you can look for a home that you can really afford. It isn't a guarantee but works as a guide to purchasing your dream home. In addition, you can add your pre-qualification certificate to your offer to purchase, which indicates to the seller that you're a serious buyer. - Find a home
You're now financially prepared to start your property search. Consider your lifestyle and needs and then make a wish list that includes the area you want to live in, the type of home you're looking for and the proximity to amenities. Start your search online and then work with an experienced property professional to begin viewing homes. With the right area specialist in your corner, you can streamline the buying process and make your home-buying experience an exciting and positive one.
Before diving headfirst into the world of homeownership, it's crucial to assess affordability, says Everitt. "Buying a home is a long-term financial commitment and you need to make an informed decision that aligns with your other life goals and plans.
"Your home is also likely to be your single biggest purchase, which is why you should work with the leading real estate company of choice to navigate the home-buying process with ease and confidence."
Author: Chas Everitt