Buying a house: How to figure out if you can afford it - This is the Life! - Build the Life of Your Dreams

Buying a house: How to figure out if you can afford it

June 03, 2021


Buying a home is a life goal for a lot of people.

If you've been planning to buy a home and you want to know if you're financially ready to take that step, there are a few things you need to consider to find out if you're in a good place to buy the home you want.

It's important to do this exercise before you start looking for houses because it'll give you an idea of where you need to be financially to be able to buy a house and what type of house you can afford. 


HOW TO FIGURE OUT IF YOU ARE FINANCIALLY READY TO BUY A HOME

Buying a home and being a homeowner comes with a lot of costs - some of those 'hidden' or unexpected - so it is key to be informed about all these factors so that you can make the most accurate evaluation of your financial capacity. 

Here are the main things you need to consider to know if you can afford a house:


1. Do you have enough for a deposit?

If you want to buy a home, you will need to have some money saved up for a deposit. 

Banks usually only lend you up to 80% of the price of a home. This means that you will have to put in the other 20% for the deposit. 

Needless to say, the more expensive the house, the bigger the deposit will be.

So if you're looking to buy a home, you need to start saving up for that deposit! 

Make sure you have built an emergency fund as well - you will need that money when you're a homeowner if you suddenly have to fix your boiler or something like that!

Bonus tip: Ask your banks about the cost of their fees. There are some fees associated with the loan approval and contract that you may not be considering but they can add up and take away from the money you have for the deposit.


2. Can you afford the mortgage payments?

Okay, so you have enough saved up for a deposit on your desired home. 

Knowing you will have to get a loan for the rest of the price, you need to know if you can afford the loan (the monthly mortgage payments). 

Talk to your bank (and other banks that may offer good conditions) or go on their websites and do some simulations of loan costs. Check which ones offer you a better deal.

Now, you obviously need to consider whether you have enough money to pay for the mortgage. 

You should aim to keep your loan-to-income ratio at around 30% and not much higher. That means your mortgage payments will only make up for 30% of your net monthly income (after taxes).

This will make it a lot easier to handle owning a home and to have enough money to pay bills, groceries and have some money left over to save, invest and to do things you enjoy, as well!


3. Can you afford the taxes? 

When you buy a home, you have to pay property taxes.

Find out how much property tax you would have to pay on the type of house you want in the location you want to see if you can afford it.

You can use an online calculator such as this one to get an idea of how much your property taxes will be and you'll avoid getting a bad surprise when the time comes to pay them!


4. Can you afford to make alterations or do renovations?

If the house needs a little bit of work before you move in, you should consider the cost of the alterations or of the renovation you want to make.

Make a plan for the work that needs to be done or hire an interior designer or architect to help you plan the renovations. They will have a better idea of how much everything will cost and can adapt the plan according to your budget.

Don't forget to consider the cost of furnishing the home! If you're going to need to furnish the house from scratch, you will also need to factor that in as it can be quite expensive to buy everything you need for your house at once.


5. Can you afford the maintenance costs and bills (including groceries etc) after paying the mortgage?

The reason why you should aim for a 30% of loan-to-income ratio is because you will need to have enough money left over after paying your mortgage to pay all your other bills and to buy groceries and other necessities.

To figure this out, you're going to need to estimate how much all these things are going to cost you.

When it comes to service bills (like water, gas, electricity, etc.), the cost can differ depending on the location and service provider. 

Research service providers to find out if they offer fixed fees and how much they are or use online calculators to figure out variable bills (if you have a bigger home, you may have a bigger electricity bill because you will have more lights; if you have a pool or backyard, you'll probably have bigger water and electricity bills and so on).

Owning a home also comes with maintenance costs - things break and need fixing when you least expect it. It might be a good idea to have an emergency fund just for that!

Don't forget to factor in the cost of any insurances you may need - banks will usually require you to have homeowners insurance to make sure your house is safe. You may have life insurance as well or even a PMI (private mortgage insurance), which protects the bank if you default on your mortgage.


6. Will you have enough money left over every month?

Ideally, you shouldn't buy a home if you're not going to have any money left over to save money and invest for your retirement or to buy other things you need.

It's really important to make sure you will have a decent life and you'll be able to enjoy yourself. You might want to go out for dinner or go on holiday somewhere every once in a while and you should factor those things into your budget because you want to be able to create an enjoyable life for yourself. 

Otherwise, you'll be constantly stressed out about money and your dream home will become a source of anxiety instead of making you happy.

If your estimates show that money is going to be super tight, then it might be worth it to wait a little longer or to find some way to reduce your costs to make sure that you will have enough money left over every month to do things you enjoy.


What your answers will tell you:

If the answer to all of these questions was positive, then you are in a good financial position to buy a home!

However, if it turns out that money is still a bit tight to buy, you might just have to wait a bit longer so that you can save up some more money, get a raise or maybe even get a new job.

On the other hand, you might still have a chance to make your dream possible if you manage to reduce your costs.


HOW TO REDUCE THE COST OF BUYING IF MONEY'S TOO TIGHT

If your calculations are coming up short but you still want to buy a home and don't want to postpone it much longer, there are a few things you can consider to reduce the cost of buying a home!


Option 1: Buy a cheaper home

The most obvious one is to buy a cheaper home - you can either buy a smaller home or look for a home in a cheaper location. 

Sometimes you can even end up buying a bigger, more comfortable home in a cheaper location!


Option 2: Get a better deal from the bank

If the loan's too expensive for you, you could try to get different proposals from different banks and then present the best proposal to the second best bank. They might want to compete to get you as their client and offer you a better deal!


Option 3: Be smart about renovations

If the problem is that you need to do some renovations and they're too costly, you can always do them in segments or even do some yourself! 

The alternative is to save a bit on the materials you use, wherever possible.


Option 4: Consider house hacking

Something else that is becoming more common is house-hacking - that is, renting out a part of your home and using the rent you collect to help you pay for the loan. 

If you have some extra space or a separate area (e.g. a guest-house) that you don't need right now, you could rent out that part of your home to offset the cost of the mortgage

You will obviously have to be prepared for the possibility of vacancy and not having that income to help you pay the mortagage.

Just remember to make sure it's legal to rent out a part of the house and/or to split the house.


Option 5: Buy a house as a co-owner

Another alternative can be to buy a house with someone else. I'm not talking about your partner here, this would be an obvious solution.

But if you are single and you want to buy instead of renting, you might be able to buy with a friend that could be your roommate.

Another option might be to buy a house with someone else and split it into two houses or apartments - one for each of you (just make sure it's legally possible to do this, of course). If the house has a backyard, you might be able to split it in half as well or just share it. It might be something fun to do with a friend or family member and it'll reduce the cost for sure!


Option 6: Consider building

Last but not least - if you don't mind waiting just a bit longer and you don't have any expectation of increasing your income right now, you might want to consider building instead of buying.

Sometimes buying land and building a house from scratch can be cheaper. 

You just have to make sure you buy land somewhere where it isn't too expensive. 

Building will usually be cheaper than buying because you'll be paying for the materials and the labor and not for the value of the area or the value that the previous owners have wanted to gain from it which keeps increasing.

You will also have the benefit of designing the house just like you want it and make it functional for you. 

There is also something to be said about owning a brand new house - you won't need to make alterations and you won't have to fix things for a while so you'll be able to save a bit of money on maintenance expenses for a while.


Well, there you have it! Buying a home is such a milestone and it can be very overwhelming to think about all the costs.

However, if you've taken all these things I mentioned into consideration you'll have a pretty good idea of whether you are financially ready to take this step.



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