How Much Can I Afford When Buying a House?

The first step in the home buying process is finding out how much you can afford to spend.

This will vary depending on a number of factors, including your lifestyle needs and your individual financial situation.

Start by looking at your income

A good place to start when figuring out how much you can afford to put towards a house is your annual income or the total income you have with your partner.

Most financial experts believe that you should not spend more than 30 per cent of your gross income on your mortgage.

For example, if your annual income is $60,000, you shouldn’t spend more than $18,000 on mortgage repayments in a year as it is regarded as being under mortgage stress.

Tip: If you’re applying for a home loan, a good employment background and a history of savings in your bank account will put you in good stead. Also, make sure you pay any outstanding bills promptly as an unpaid bill could affect your credit rating and future loan application. Yep!

How much can I afford to put aside? List your expenses

It’s important to consider the other expenses you will need to be able to cover when juggling mortgage repayments. If your house payments and your expenses are going to leave you little wiggle room for emergencies and savings, then the amount you’re looking to borrow is too much.

To work out a realistic budget, make a list of your regular monthly expenses.

Include:

• Household costs including phone and internet bills
• Utility bills – water, gas and electricity
• Insurance costs
• Credit card bills
• Petrol
• Groceries
• Public transport costs
• Clothes
• Health costs
• Entertainment
• Any debts you may have.
• Daily Coffee and lunch expenses

Tip: Try to minimise your debts as much as possible before you apply for a loan to give yourself every chance when applying.

How Much Deposit Will I Need to Pay?

It’s likely the deposit will be your biggest consideration when determining the kind of house you can afford to purchase.

This is generally 10 per cent of the asking price, and it is something you need to be able to afford comfortably before looking for a house.

If you can only afford the deposit, you will need to take out a loan on the remaining cost of the house.

It’s possible to take out a loan for 95 per cent of the value of a property, but it is advisable to have more than 5 per cent of the asking price at your disposal in case of emergencies or urgent repairs your new property may require.

Stamp Duty and Mortgage Duty

You will need to be able to pay stamp duty on the property you purchase.

This is a government tax that is not negotiable, so make sure you take this into account when calculating how much you can afford.

The amount you pay in stamp duty depends on several factors: the value of the property, the state you live in, and whether you are eligible for government grants. The amount of mortgage duty you will need to pay depends on the amount you borrow.

Calculate Your Stamp Duty Online

It’s easy to calculate the stamp duty payable on your house online – make sure you go to the correct website depending on which state you live in.

This free stamp duty calculator is a handy resource.

The First Home Owner Grant

Are you a first home buyer? The First Home Owner Grant (FHOG) was set up to offset the cost of stamp duty for first home buyers and help them afford the cost of buying a house. Eligible home buyers can receive a grant of up to $10,000 on a newly built home or apartment under $750,000.

Stamp duty discounts of 40 per cent are also available to all first home buyers in Victoria after 1 July 2013. This will increase to 50 per cent after 1 September 2014.

Check out further information on the FHOG for each Australian state here.  

Did you know? You might be eligible for a First Home Savings Account. These are designed to help first home buyers afford a home sooner. The government contributes a certain amount to First Home Saver Accounts, for up to $6,000 per year (Source: ato.gov.au). For more information in this area take a look at this link here.

Other Grants

The government gives grants to other home buyers as well. It’s worth finding out if you’re eligible for the following:

• Defence Home Owner Scheme: this gives people serving in the Defence Force a subsidy on the interest for an approved mortgage
• Special Needs: for people with disabilities or low income
• Pensioners can also receive a concession or exemption on stamp duty.

Interest Rates Will Affect How Much You Can Afford to Spend on a House

When shopping around for a home loan it’s a good idea to take into account the current interest rates. The Reserve Bank of Australia (RBA) sets the cash rate at each monthly board meeting, and this rate influences the interest rates that banks will charge.

Most major bank websites list the loans they offer. Spend a bit of time investigating your options for home loans, based on the amount you can afford to repay each month (i.e., 30 per cent or less of your gross income divided by 12, should give you your monthly amount).

A simple way of figuring out how much you can afford to pay off is the following:

Divide the amount you can spend annually on a mortgage repayment (30% of your gross income) by the interest you will be charged. So for a gross income of $60,000, 30 per cent would be $18,000 per year to spend on mortgage repayments.

For example, $18,000 divided by 0.061 (if the interest rate on the loan is 6.1 per cent). This will give you an approximate total figure you can afford to borrow, in this case, $295,081. This figure should take into account all the added purchasing costs and the 10 per cent deposit if you haven’t set that aside separately.

Tip: Don’t borrow more than you can afford to pay off! A house is an important purchase, but it’s not worth over committing if you are unable to repay.

Online Calculators

There are plenty of online calculators that will ask you for the above information – income, expenses, down payment amount – to give you an initial idea about how much house you can afford.

Make sure you find a site that is Australian and specific to your state if it is telling you things like stamp duty costs. We recommend using a major bank website like the Commonwealth Bank  or ING Direct.

These calculators will give you a good indication of the amount you can borrow based on your income and expenses.

Need More Information? Seek Professional Advice

For further information, you can approach your bank or a professional mortgage broker.

They will be able to give you an accurate assessment of the amount you can afford to spend on a house, based on your income, expenses, and how much you need to borrow. A good finance lender will explain all the costs to you and give you a realistic idea of what kind of loan you can afford to pay off.

You should get pre-approved for a home loan before you begin house hunting. Getting pre-approval for a loan is free, and you will get an official estimate of how much you can borrow and safely pay off.

Other Costs: Moving in

Don’t forget about the costs of moving into your new property when you’re looking at how much you can afford.

This will include hiring a van or professional removalists to move your things from one property to another.

There are also set-up costs involved when purchasing a property, which may include connecting or reconnecting a phone line, internet, gas and electricity, and other services.

How Much Can I Afford in the Long-Term?

Take a look at the list of expenses you wrote above and think about whether any of these will increase.

If you’re moving further away from work, you’ll need to factor in a higher spend on petrol or public transport.

Your life circumstances may also change – relationships, marriages, children, and the loss of a job all affect your financial situation. Keep in mind that you cannot always foresee the future, so try and plan as best you can and err on the side of caution.