So as I mentioned in my last post, a friend of mine is about to take the first step onto the property ladder, and we’ve been chatting all things house buying!
But there’s one key question we haven’t covered yet, and it’s a biggie:
How do you actually know what home you can afford?
We all love browsing listings on Zoopla and RightMove and have a pretty good idea of our dream home, but where do you even start knowing what you could realistically buy?!
Well, as you probably already know, most people get on the property ladder by saving up a deposit, and then taking out a mortgage to cover the difference. The mortgage lender will look at your deposit, your income and monthly outgoings, and various other factors to decide how much to offer you.
But there are several other factors you should keep in mind. Here are some things to consider as you start to work out your budget:
List additional expenses
It’s tempting to throw every penny of your savings into your deposit. But don’t forget, there are many other things you’ll have to shell out for when buying a property. Research the likely costs carefully, and don’t risk running out of money at a crucial time!
Here are some things to consider:
- Solicitor fees
- Surveyor fees
- Additional mortgage feed – valuation fee, booking/arrangement fees – these vary by lender
- Stamp duty – this is currently suspended until 31st March 2021, and the government are set to debate an extension, but if you might be buying later this year be sure to monitor the situation!
- Removal company/van hire/packaging materials
- Decorating, renovations, new furniture
These costs can all vary a lot so you’ll want to do your own research, but the Money Advice Service has a good rough guide as a starting point.
And don’t forget to keep an emergency fund for any unexpected repairs that might crop up after you’ve moved! Even if you’ve done your due diligence and had a thorough survey done, things happen such as boilers breaking for no apparent reason. It’s no fun to be without heating on a cold night because your boiler conked out and you don’t have the funds for a replacement.
Use a mortgage calculator
A mortgage calculator is an invaluable tool to help you work out what you could afford. There are a few different ones online, ranging from the very simple to incredibly complicated. I’ve been experimenting with this calculator, which is a great way to see some various projections. It’s specific to the UK and has lots of different options for people who like to play with different scenarios.
You would enter in your deposit, the price of the home you’re looking at, and the mortgage term length in years in the top boxes. In the next section, you can enter expected interest rate changes – but if you’re not sure, just leave this with the pre-filled suggestions.
The calculator will then tell you what your monthly mortgage repayment will be. And here’s why this calculator is a step better than many others I’ve looked at: it will also tell you the possible maximum repayments if/when interest rates rise.
This is such an important factor to consider. Many people assume that their monthly mortgage payment will always be the same. But that’s unfortunately untrue.
Interest rates are currently extremely low as a result of the Coronavirus pandemic. That means it’s a good time to buy, and try to lock in a fixed term mortgage for as long as you can.
However, at some point rates will inevitably go up again – and when your fixed-term mortgage contract ends, that means your repayments will increase. It’s important to use the mortgage calculator’s projections to ‘stress test’ your budget, and consider what you could really afford if your bills go up.
Consider lifestyle changes
Ok, so you have a picture of of the kind of property you can afford right now. But you need to have a serious think about whether you have and need any flexibility in your budget. A mortgage is a long-term commitment. Will your lifestyle and budget be the same in 5 or 10 years time?
The biggest thing to think about is your family planning. Do you plan to have any (more) kids, and if so, would you or your partner give up work? Even if you both plan to carry on working, don’t forget that childcare fees can often wipe out one salary! And maternity leave can be a struggle if you’ll be on a reduced income.
Many people make the mistake of taking the biggest mortgage they can to get the absolute best property they can afford while they’re young, double income and kid free, only to find it doesn’t leave them much wriggle room in the budget once things change.
Even if children don’t come into the picture, would you like to travel more? Save more for an early retirement? Start a business? Does your mortgage leave you enough savings to do all these things?
Again, this is where playing around on a mortgage calculator can come in useful. You can see what your monthly repayments would look like in different situations and play around with some sample budgets to see how you could make it all work.
Do you have any other tips for first-time buyers considering how much they can afford? Share in the comments below!