How much should I spend on a property?
5 simple steps to budgeting for your next property
You've probably already noticed that working out how much you should spend on a property, rather than how much you could spend is a smart approach to money management.
Before deciding on where you want to buy, or even what type of property you're after, it's best to think about exactly how much you should spend. And, to help work that out, here are five easy but vital considerations to make when calculating your property budget.
To help determine how much you can afford to spend on a property, you must first calculate what amount you are prepared to make in repayments. After all, buying property is about securing the best place you can afford, but also being able to continue living your life full of rich experiences. Start by combining what you are currently paying in rent plus putting away into your savings each month. Then, look at your average monthly expenses over past 12 months. Try to identify any areas you would be prepared to cut back. Your end figure should provide a good indication of how much you can afford to pay off your mortgage each month. This process should take no more than ONE hour if it takes longer, have a chat to us about how to simplify your finances or check out our Smart Money Tool.
Plan ahead and think about any possible changes to your income or expenses during the next two to three years. For example, if you're planning on having a baby and require maternity leave, or you're anticipating additional professional development or travel expenses, you may need to drop your repayment amount back. Alternatively, an end of year bonus or expected income increase might mean you can push a little more money into your loan, increasing your borrowing capacity.
Save as much as you can to put towards your deposit. Remember a deposit of 20 per cent of the purchase price means you avoid lender's mortgage insurance. Don't forget to factor in the additional expenses of buying a property such as legal fees, stamp duty, building and pest inspections, removal costs and insurance. Then you need to work out how much money you need or want to hold on to as a buffer.
Understand the different loan types, structures and repayment options available to you. For example, while a fixed rate loan might seem like a good idea now given the record low interest rates in Australia, there can be catches and costs associated with these loans. You could be penalised if you pay extra money off the loan, or pay it off during the fixed rate period. The key is to develop a lending strategy that's right for you and one with flexibility which is where a mortgage manager like FinancePath, who has access to the most flexible fixed rate loan facilities in the market can help.
Think about potential movement in interest rates and how this could affect affordability in the future. Remember, while the Reserve Bank of Australia sets the cash interest rate, which is reviewed every month, credit providers can set their own rates. What's more, even a small difference in interest rates can have a big effect on your hip pocket each month, so plan ahead.
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