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December 29, 2015

Home Buying: How to Come up with A Realistic Budget

Many first time buyers make the colossal mistake of purchasing the biggest and most expensive home that they can without thinking about the long-term consequences. Although an extra bedroom and an acre of land might seem like a good idea at the time, having your salary completely eaten up by your mortgage payment each month is a disaster waiting to happen. An unexpected expense such as boiler breakdown could mean you are unable to afford your mortgage payment and could result in you falling into debt. Purchasing the house you can afford rather than the house you want will result in less stress, freedom from debt and a better quality of life for you and your family.

Calculate Your Budget

A good rule of thumb when buying a house is to have a down payment of at least 20% of the total value of the property. So if you have managed to save up £50,000, then you can look for houses up to the value of £250,000. There are some mortgage lenders that will grant mortgages with only a 5% down payment, but these often charge more interest and a higher monthly payment. When calculating how much mortgage you can comfortably handle, try to aim for your monthly payment to be between 25% and 33% of your total monthly income. As well as your mortgage payment, you will have a number of other expenses such as home insurance, utilities and care and maintenance of your home. If you need help figuring out how much house you can afford, there are a number of online calculators that can help you figure out the math.

Write Down what You Need

A spare bedroom and an en-suite bathroom are nice extras to have in your new property, but most people do not really need them. Make a list of things that you absolutely must have in your new house such as a certain number of bedrooms for your children, a garden for pets, or a home office for those that work from home. Visit an estate agent website such as Watson Bull and Porter to see if there are any suitable houses within your price range. If the house you need is still way over your budget, then you might want to wait a few years to save up for a larger down payment.

Have An Emergency Fund

Any homeowner will tell you that owning your own house does not necessarily equal financial freedom. Any problems with your home such as a damaged roof, crack in the foundation or a burst pipe will be your responsibility and could end up costing thousands of pounds. Always have an emergency fund available in a savings account to cover any large, unexpected expenses. When buying a house, there are also a number of hidden charges that can add several thousand pounds onto the final cost of your home. Estate agent fees, home surveys and lawyers' fees can be surprisingly expensive, so always remember to factor these in when calculating the total cost of your house.

Avoid Looking At Houses Outside Your Budget

Although it may be tempting to view a few more expensive properties just to see what else is out there, it can end in disaster. Buying a home is a very emotional process, and many people can fall in love with a house that is completely out of their price range. This can then lead to them going ahead with a purchase that is against their better judgement. Having to spend more money on your mortgage payment every month means you will have less money to spend on things like renovations, furniture, holidays and day-to-day living. With the average mortgage lasting for around 25 years, having to live on a strict budget for so long will leave you in danger of falling into debt should something go wrong.

Your home is most likely the largest purchase you will ever make, and you will spend a large portion of your life paying it off. Therefore, it is important to make the purchase using your head rather than your heart to avoid falling behind on your mortgage and losing your home. The recent housing crisis resulted in thousands of people all over the world having the bank foreclose on their house due to them taking on far more house than they could comfortably afford. Purchasing a smaller home and having it for life is far more attractive than overspending on a huge property only to lose it five years down the line. 

About the Author: Lucy Penn works in a real estate brokerage and is always pleased to offer her property purchasing insights to an online audience. She is a frequent writer for several property-related websites.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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