Finance | 5 October 2021

How Much Should you Really Spend on Your First Home?

by Carlisle Homes

Looking to buy or build? Create a realistic budget based on this guide.

Buying or building your first home is an exciting prospect. But before you can even start looking, there’s a fundamental question you need to answer. How much can you afford to spend?

The answer will depend on the size of your deposit, your income and what other expenses you have. However, that’s not the end of the story. Sometimes, it makes sense to stay well under the amount a lender will let you borrow. In other circumstances, spending the extra now will help you save in the long run.

So how do you arrive at the budget that’s best for you?

Start with the basics

What you can afford in your first home depends on your income and outgoings. Draw up a budget that gives you an accurate and comprehensive idea of what both are. Don’t forget to include all forms of income, including:

  • Salary
  • Government benefits, for example Family Tax Benefit
  • Share dividends
  • Rental income

If you’re thinking about buying or building your first home, start the process by getting a better understanding of your parameters and drawing up a budget.

Your expenditure should also be as accurate as possible. Rent, bills and other fixed expenses are relatively easy to assess, but variable costs can add up to far more than you realise. The best way to make sure you’re capturing all of your expenses is to download at least the last six months of bank statements and add up your spending. You might be surprised at how many hidden costs there are. Learn more here.

Include all debts, as well. If you’re making credit card payments, paying off whitegoods or furniture, leasing a car or servicing a personal loan, those are part of your expenditure. The bank will want to know about every liability once you get to the point of applying for a loan, so it’s best to have these listed now.

Your budget will tell you how much you have left over after paying expenses every month. But how do you know if that’s enough? Home owner costs aren’t the same as those incurred by tenants. As well as your mortgage payment, you’ll need to cover council rates, water rates and home maintenance costs. If you’re buying into strata, that’s another expense that tenants don’t have to meet.

Use the 30% rule

When you’re measuring housing affordability, the rule is that your housing costs shouldn’t be more than 30% of your gross (pre-tax) income.

This is to buffer you against interest rate hikes.

If you are very frugal with your spending, or you have a larger than average income, you might have significantly more than 50% of your income to spend on housing. However, if your mortgage is such a large proportion of your income, you can very quickly fall into mortgage stress. If rates rise, you won’t have much room to cut back on other expenses to compensate. Learn more about avoiding mortgage stress here.

To use the 30% rule, follow these steps.

  1. Calculate 30% of your gross income on a monthly basis. If you earn $100,000 per year, 30% equates to $2,500 per month.
  2. Using a loan calculator, add the figure from Step 1 as your monthly repayment.
  3. Set the interest rate at a basic variable rate, or a little above the fixed rate to allow for some rate rises. At 2.5%, you can borrow $630,000 with a monthly repayment of $2,490.
  4. Assuming you have a 20% deposit, your total budget is $787,500 ($630,000 /0.8). Your deposit will be $157,500.

When mapping out your saving strategy, the 30% rule is a good place to start as it works a buffer into your budget incase interest rates rise. Featured here: Montague Grand Deluxe, Orana Estate, Clyde North.

Do a test run

Still not sure? Try living on the amount you’ve budgeted after mortgage repayments for a few months.

Set up a direct debit for the amount of your proposed monthly mortgage payment. Don’t forget to factor in other ongoing costs, such as council or strata rates.

If you can live on the remainder for a few months, that’s a good sign that you’ll be able to afford it. As a bonus, you’ll be well on your way to affording that deposit!

If it’s a struggle, look at your budget again. Are there things you can cut, such as subscriptions or discretionary spends? Can you negotiate lower insurance premiums anywhere? Learn how to boost your savings here.

Look to the future

There are times when borrowing up to your maximum budget can make sense.

Moving house is expensive, thanks to real estate costs and stamp duty, so you want to build a first home that will be suitable for at least the next five years (and hopefully many more). If you’re planning a family, or already have young children, you’ll need to make sure there’s enough space for them to live comfortably as they grow.

If it’s reasonable to expect that your income will go up, that acts as another safety buffer. Perhaps you’re close to completing professional qualifications, or you’re in line for a promotion. If you’re confident you’ll see a salary hike soon, it’s less risky to stretch your budget now.

On the other hand, make sure you’re not extending yourself too much if your salary drops. Planning a family often means planning for one partner to reduce their income: sometimes for several years. Maybe you’re going back to study, or you want to start a new business. If any of these are part of your planning, you should ensure that you can still pay your new mortgage when they happen.

At the end of the day, building your first home should be an exciting moment, not a stressful one. Make sure you’re comfortable with your budget so you can relax and enjoy moving in. Find a mortgage structure that’s right for you here.

When buying or building your first home it’s important to think ahead and plan accordingly. Don’t just think about your budget now - think about how it might be impacted in the future.

If you’re ready to look for a home loan, or you just want to know what your options are, visit our industry leading experts at Loan Studio. To find out more about buying the house and land package that suits your budget, call Carlisle Homes on 1300 535 416.

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