Home loan affordability:
Things to consider before buying
Estimated read time: 4 Minutes
In order to make sure the mortgage you commit to now will still be affordable in the future, it’s a good idea to be cautious when it comes to estimating your repayments.
For example, it may not be the best idea to borrow the maximum amount that a lender is willing to offer you. Here are a few things to consider:
1. Tally up all the costs of buying a home
The costs of buying a home don't begin and end with the mortgage. As well as being able to successfully save for a house deposit, it’s important to be aware of all the fees involved in buying a home before and after your loan settles.
Outside of a mortgage, stamp duty is likely to be one of the biggest costs you’ll have (it varies from state to state) and is usually paid upon settlement of the loan.
In addition, other one-off fees include loan establishment fee, title protection and legal fees, as well as mortgage insurance fees (if applicable). You may also want to get a building inspection carried out on the property before you buy.
The costs of buying a home don't begin and end with the mortgage.
If the amount you're borrowing is greater than an 80% loan-to-value ratio (LVR), then you may be required to pay Lender’s Mortgage Insurance (LMI) – this is a risk fee payable to the lender to protect them if you default on any mortgage repayments. So the more money you save for a house deposit, the more you’re likely to be able to borrow without having to pay LMI.
There are also other ongoing costs when you’re a home owner including body corporate or strata fees, council rates, utilities or insurances.
These are all predictable expenses and it’s important to closely look at what you can realistically afford to repay each month. It also means you’ll avoid surprises down the line.
To get you started, use our Home Loan Repayments calculator as a guide to what your repayments could be on your new home loan.
2. Consider changing circumstances
Whether you love to travel, are thinking of starting your own business or want to start or grow your family, you shouldn’t have to let home loan repayments dictate those life choices. Build in buffer now so you have more flexibility as things change.
Think about your plans for:
- Family - children create additional expenses, plus you're more likely to be living in on one income instead of two for a period.
- Career - are you dreaming of going back to study? Or a career change? Factor in the short-term impact this could have on your current income.
- Renovations - is the house a fixer-upper? Or will you want to make your own mark on the place down the track? Be sure to include potential renovation costs and how you plan to finance them.
- Interest rate changes - a variable rate may shift with market changes, while fixed rates are the same for a specified period. Lenders consider your ability to repay the loan at a higher rate when determining how much they will lend you, but it’s also a good idea for you to decide how comfortable you would feel if rates go up again as it can impact your monthly home loan repayments. Learn the difference between variable and fixed interest rates.
- Safety nets - insurance premiums, such as income protection, may add to your monthly costs but they also give you confidence you can always make your repayments no matter what happens in life.
Remember: When deciding on a home loan, it is also important to compare the types of home loan features available that might support your changing needs in the future. For example, redraw facilities and offset accounts are some of the most popular options that will give you flexibility in managing your cash flow should your situation change.
3. Be realistic about your expenses
How do you imagine life will be once you have a mortgage? Do you love dining out, going to the movies? Or have regular subscriptions you can’t live without?
It’s fine if you intend to continue your lifestyle, as long as you’re realistic with yourself. With a little planning, many people can afford a home loan without completely giving up their lifestyle.
These handy budgeting tips could help you stay on track with your finances.
Work out the must-haves and nice-to-haves before you commit to a mortgage, and you will be prepared both emotionally and financially for this next exciting stage of life.
It’s also a good idea to speak to a financial adviser to make sure the amount you are looking to borrow is in line with your current situation and financial goals.
Ready to get started?
Contributor | Barry Saoud, General Manager, Mortgages and Commercial Lending
Barry joined Pepper Money in July 2021 as General Manager, Mortgages and Commercial Lending. He is responsible for the strategic direction and operating performance across product, credit, and settlements for mortgages, commercial loans, personal loans, and direct sales. Read more.
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