Before you embark down the road to buying your first home (or any home for that matter) you need to get a rough idea of how much you can reasonably afford to spend. But where do you begin? Here is a simple equation that helps answer that all important question as well as highlight some of the key financial matters you should be concentrating on:
Spending power = Borrowing power + deposit + government grants and concessions – home acquisition costs
Let’s look at each segment in more detail:Borrowing power - this quantifies the amount a lender is willing to lend to you. To work this out, a lender looks at things like your income, your personal expenses, current financial commitments and credit rating. There are free online tools that will give you an indicative feel for your borrowing power but remember at the end of the day it is your lender who will decide how much they think you can afford. Click here for an example of a good borrowing power tool.
Deposit – this is the amount of your funds you’re able to contribute to the purchase price. The bigger the deposit, the more you can spend or the less you have to borrow. Its a good idea to try and save up at least a 10% deposit – so if you were looking at buying a property worth $350,000 try and save at least $35,000.
Government grants and concessions- if you’re a first time buyer you could be eligible for certain grants and concessions. These could give you extra cash or save you money on certain government charges – like stamp duty. Each State has its own benefits scheme so you need to check your entitlements and your eligibility. Click here for more information.
Acquisition costs – these are the other costs associated with buying a home and include things like lenders fees (lenders mortgage insurance, application fess), legal fees (conveyancing) and other government charges (land transfer, mortgage transfer and stamp duty). On top of this you could include things like inspection fees, insurance and moving costs.
Once you know the amounts for each part of the equation you’ll be able to work out how much you can afford to spend on your home.
