Can I afford to buy a house?

If you’re looking to buy your first home in 2021, no doubt your first question is whether you can afford it?

A good exercise to answer this is to calculate what are you currently paying in rent or board? Whether you live alone or with a partner, that’s a quick figure to gather.

As of February 2021, interest rates are at a historic low - coming in at around 2.29% (1 year fixed) of your mortgage. Add another 1% and mitigate a 3.3% interest rate at a later stage, and you have your first solid figure.  

Now let's say, for example, you're currently paying $350 per week in rent and you’re considering what to save. If you’re a couple both saving around $100 a week, you’re now on a respectable $550 per week. 

A home loan of $440,000 at 3.3% will give you  mortgage payments at around $450 per week, so by showing your savings and current living costs are at or above mortgage payments you will find yourself in a good starting position to think seriously about getting on the property ladder. 

Of course, there are other considerations to look at - the most important being insurance. Depending on the size of your property, what’s in it and the age, you will need contents and home insurance. Add council rates to that and a budget of an additional  $70 to $90 per week for these expenses (depending on the region) and you would still be within your budget if it matches the above example.

We often spend within our means and when we have a goal in mind, a solid figure to buy a property and meet our repayments, we’re generally able to match it. When you study your budget and look at your spending with a simple spreadsheet layout for example, you can often find ways to actually trim back spend and create surplus income to make the affordability of owning a home more achievable. 

How to calculate my mortgage payments

The most effective way to calculate this is via an online mortgage calculator. Most banks have one, and so do we…

Found here ➜

These calculators are fantastic tools to get an idea on what you may be able to afford and the size of mortgage you’d like to get. But let’s walk through the correct way to use them.

Start with your interest rates. Right now, they’re as low as 2.29% (1 year fixed), but it’s good to calculate a few higher options - like I mentioned above at 3.3%. 

Put in the loan amount. Again, this might mean adding a few options depending on the property value you’re looking at. Try to aim for options at the higher end of your budget, and the lower. 

For now, set the term length at 30 years. This allows you to have a good overview of a realistic term, but of course can be shortened once you get a better idea of plans. 30 years will also give you the minimum payment required. 

Calculate how fast you can pay it off. A good exercise that will encourage you to save is adding in the difference you can cover during this low interest period. That $100 extra a week will knock years off your mortgage, and this is worth seeing during your calculations. Take advantage of this reduction of interest while you can. 

Taking the above steps, adding on the insurance and rates, you now have a realistic figure you can begin working towards.

If 2020 proved anything to us though, it’s to plan and to mitigate as much risk as possible. While those interest rates are low, landlords are raising their rental fees. We also know that things can change that make repayments more challenging. When you do your calculations, allow for movement. That $10 - $20 left over each week should be going into an emergency fund that isn’t attached to a debit card. 

Small actions like this will go a long way to getting you on the property ladder, and keeping you there.

If you’re keen to understand more specific mortgage rates as of the first quarter of 2021, reach out today for an obligation free chat.