3.3 min read
How Much Can I Afford For a Home of My Own?
It's easy to get carried away when you start looking at beautiful homes on the internet and want to buy one! But, before you start rushing around looking at some of your dream homes, take some time to work out just exactly how much you can afford for a home.
It's actually relatively easy to work out such an amount but read on, and we'll tell you exactly how to do it:
How Do I Calculate What I Can Afford?
There are two parts involved in calculating the total amount of mortgage you can obtain. Add the figures from both pieces together to find out the value of the home you can buy:
- your savings: these savings should be money you have specifically saved to purchase a property.
It's wise not to use all of your savings for buying a home. This is because you may have other needs for your money. You never know when unexpected expenses might be.
Typically, you will need to have 10-20% of the purchase price saved up to buy a property. This amount will be for the deposit or initial payment. This deposit is sometimes called the "buyer's equity." The rest of the purchase price will be provided via a mortgage loan.
So, as an example, if the home you wish to buy is $300,000, you will need $30,000-60,000 in savings as a downpayment.
- The mortgage loan you can obtain: various factors determine how much a mortgage provider will lend you to buy a home.
Basically, the most critical point is the salary you earn. Your job security and prospects are also taken into account.
Mortgage Lenders and Repayments
Mortgage lenders will lend an applicant 4 or 4.5 times his/her gross salary, i.e., before taxes or expenses are deducted. In some cases, this can reach 5 or 6 times.
In any event, mortgage repayments should not exceed 28% of your pre-tax income. This includes property taxes and home insurance. A further limitation is that your total debt should be no more than 36% of your pre-tax income. Total debt means your mortgage and other debt such as car loans or student loan repayments.
As an example, simplistically, if your salary is $80,000 per annum, you may be able to get a mortgage loan of $320,000-360,000. Your annual mortgage repayments should not exceed $22,400 (28% of $80,000). Your total yearly debt repayments should be $28,800, or around 36% of your $80,000 salary.
Let's Do the Maths
Suppose you have a partner who is working and receiving a salary. In that case, their income may be considered if they are also responsible for helping with mortgage repayments.
- Do the maths: It's possible to find a mortgage payment/repayment calculator online to help you work out how much your monthly payments will be. This calculator also takes into account changes in interest rates.
Total up your savings and the amount of the mortgage the lender will provide to find out how much in total you can afford. From the example above, a buyer should be looking at buying a home for between $350,000-420,000. That is, $30,000-60,000 (initial payment) plus a loan of $320,000-360,000.
Of course, you are not obliged to buy a home for the maximum amount you can afford. It may be prudent to not "max out" the loan you are offered if you can help it.