Buying a home is a big step – and the very first step is to work out a realistic budget that you can qualify for a mortgage on, and comfortably pay off each month.
Here are eight factors to consider when working out the right budget for your new home.
- Test out what you can afford. Talk to a mortgage expert in advance. They will give you an idea how much house and what monthly payment you can afford. To test how comfortable those payments will be, start saving that additional payment amount every month. Not only will this mimic the cost of ownership, it also helps you save for a down payment!
- What are you comfortable paying? It is not only about the maximum you qualify for. The most important thing is what you are comfortable paying on a monthly basis to make sure you enjoy your lifestyle and aren’t overstretched.
- Consider a longer amortization period. Remember that the longer the amortization period, the lower your payments. It will give you flexibility and you can still pay off your mortgage faster just by increasing payment frequency.
- It’s not just the mortgage. Home ownership comes with additional costs to consider such as property taxes, strata fees (if applicable), increased costs for energy and transport, etc. Plus you should set up a rainy-day fund, too.
- How long you will live there? The costs of buying a house include legal fees, appraisals, inspection fees, moving expenses, etc. If you don’t plan to live in your home for at least five years, you may not gain enough equity to make selling it again worthwhile. In that case, would you be able to rent it out? Is it financially sensible to buy it at all?
- How much house do you need? Buying a smaller house can end up costing you extra if you have to sell right away due to a growing family. On the other hand, buying more house than you need incurs extra costs. Take care to get it right.
- Enhance your credit rating. The higher your credit score, the more you will qualify for. Check your credit report and fix any issues, don’t apply for any new credit, stay well below credit limits and pay your bills on time.
- Remember closing costs. While you are saving your down payment, save for closing costs too, which you’ll need at the end of the process. The lender will require you to have at least 1.5 per cent of the purchase price for closing costs.
When you’ve defined your budget and saved your down payment, it’ll be time to work with your mortgage broker to get pre-approval in place – and then you’re ready to go.