family budgeting

How to Calculate Your House Buying Budget

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Calculate Your House buying budget
House Buying Budget. Image by Marcel @

There’s no doubt it’s getting harder and harder to afford to buy a house. The prices keep going up and wages….well, not so much.
We bought our home 12 years ago. And we took drastic steps to be able to afford it.

We moved from Sydney to Queensland, where we knew no one and had no jobs to go to. We didn’t get the house and yard we wanted, instead, we bought a poky little townhouse that I HATED at first sight.

Why did we take such drastic measures to buy our own home? Because we wanted somewhere to settle and we had worked out how much we could afford and there was no way we could afford to live in Sydney. Nor did we want the busy lifestyle or the commute.

Before even seeing a lender, it’s always a good idea to assess for yourself whether you can afford to buy a home and how much you can afford to borrow. Do you meet the lender’s requirements? What amount do YOU feel comfortable paying off? (Lenders sometimes offer more than you think you can repay – before the credit crunch, anyway!)

Taking the time to realistically calculate for yourself the loan repayments that you can pay can save years of potential financial pain as well as give you financial flexibility over the years to come.

How to Work Out Your Perfect House Buying Budget

1. Draw up a budget

The only way that you can work out how much you can afford to repay each month is to draw up a budget. How much do you have left over for the mortgage once your expenses are paid for?

Be realistic about the expenses that you include in your budget. Think about holidays and entertainment. You don’t want life to stop once you buy a house.

Consider the extra costs of owning a home. These could include:

  • Rates
  • Body Corporate Fees
  • Insurance
  • Maintenance – think both general maintenance like lawn mowing or changing the tap washes, and emergency maintenance like hot water heaters blowing up.
  • Will you be travelling further to work or further to the shops? Factor in extra fuel costs.
  • Moving Costs
  • Setting up costs – you might want to put in new curtains or install a dishwasher, or you may need some new furniture to fit in the new house.
  • Renovations

Drawing up a rough budget will give you a good idea of cash flow with a mortgage. To summarise, you want your budget to show your current income less actual current expenses (except rent), mortgage repayments and associated costs of owning a home.

2. Calculate repayments

You’ve done your budget, and you know how much you can repay each month. Use an online calculator to punch in your repayment figure, the current interest rate and the loan term. This is how much you can afford to borrow.

Things to consider:

  • Is your monthly repayment amount 45% or less of your pre-tax monthly income?
  • Make some adjustments to the interest rate. Can you make the repayments if the interest goes up?
  • Make some adjustments to your repayment amount and see how many years you will save if you pay a few extra dollars a month, or if you pay fortnightly.
  • The bigger your deposit, the higher the purchase price.

To stay in control, get pre-approval and secure your finance before committing to purchasing a house.

3. Factor in other scenarios

Now play around with the numbers in your budget (Excel is good for this) and run different scenarios to see how those scenarios affect your bottom line.

  • Will you still be able to make the repayments on your mortgage when the interest rates go up? By 1%? By 2%?
  • Will you still be able to make the repayments if you have a baby?
  • Can you make the repayments on one income? What if one partner loses their job?

4. Cost of buying a home

When saving for a deposit, don’t forget to factor in the initial costs of buying a home.

  • Stamp duty
  • Mortgage insurance
  • Conveyance fees
  • Loan fees

You may also be eligible for the First Home Buyers Grant.

It’s easy to get excited about buying a house and neglect to do the maths on the affordability. Before you know it, you’ve fallen in love with your dream home, signed the contract, only to find out down the track that it was more than you could afford.

Stay on top of the game by running the numbers and working out how much you can afford first. Your future (less stressed) self will thank you.

P.S. The photo of the cute little house was taken in rural New Zealand.


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One Comment

  1. I really like this. The common issue I find is people ask me is what can I afford. It is a lot more practical to tell a mortgage broker or lender I can afford this (via a budget) and then tell me what that means to how much I can borrow.

    I’m really enjoying you take on credit and look forward to reading the many other topics you have.

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