A First Time Buyers Guide To Budgeting
As a first-time home buyer, it’s important to be aware of the financial implications of buying a property. Knowing how much you can afford, and creating a budget that allows for all the costs associated with a purchase, will help make the process smoother and more successful. This blog post will provide a first-time buyers guide to budgeting, covering the essential steps and tips to help you get the most out of your purchase. We'll look at the process of budgeting, from working out your finances to tracking your expenses. With a bit of planning and foresight, you'll be able to make sure that you have enough funds to cover all the costs associated with buying a house. Read on to find out how to budget for your first home purchase.
Establish a Clear Goal for Your Home Purchase
When it comes to budgeting for a first home purchase, it’s important to establish a clear goal for your purchase. To do this, you need to think about what you want out of your home purchase. Consider the size, type, and location of the home you’d like, as well as any features you might want. Make sure your goal is realistic and achievable, given your current financial situation.
Think about the type of home you’re looking for. If you’re a first time buyer, you may want to consider a smaller home that won’t require as much money upfront. You may also want to consider a home in a more affordable neighbourhood if you’re on a budget.
You should also take into account the location of the home. Consider the distance from your workplace, the local amenities, and access to public transport. Location can have a big impact on the value of a property in the long term, so it’s important to think about the future when making your decision.
When it comes to features, think about what’s important to you. You may want a modern, energy efficient home with all the latest features. Alternatively, you may want a home that’s more basic but that you can fix up over time.
Finally, consider the long-term impact of your purchase. You may want to think about how you plan to use the property in the future, such as whether you plan to stay there long-term or if you plan to rent it out. This will help you determine if the property is a good investment for you.
By establishing a clear goal for your home purchase, you can ensure that your budgeting is on track. Remember to think about the size, type, location, and features of the home you’d like, as well as the long-term implications of your purchase. With a little bit of research and planning, you can make sure you make the right choice for your budget.
Calculate Your Maximum Affordable Mortgage
When budgeting for a first home, it's important to calculate the maximum amount you can comfortably afford to borrow for the mortgage.
It's important to understand that the amount you are approved for does not necessarily mean it's the amount you should borrow. You should only borrow as much as you can comfortably afford to pay back. Before you apply for a mortgage, it's best to make sure you have a good idea of the maximum amount you can afford to borrow.
The first step to calculate the maximum mortgage you can afford is to work out your debt-to-income ratio. This ratio is calculated by taking your total monthly debt payments and dividing it by your gross monthly income. It is important to include all of your debt payments, including credit cards, student loans, car payments and any other regular monthly payments.
It is also important to take into account your other living expenses including utility bills, food, entertainment, insurance costs and any other expenses you may have.
The Australian Prudential Regulation Authority (APRA) limits the amount of money banks can lend based on a borrower's debt-to-income ratio. Generally, banks will require borrowers to have a debt-to-income ratio of no more than 45%. This means that your total debt payments should not exceed 45% of your gross monthly income.
Once you've calculated your debt-to-income ratio, you can then work out the maximum loan amount you can afford. Banks generally use the following formula to calculate maximum loan amount:
Maximum Loan Amount = Gross Monthly Income x (45% - Total Monthly Debt Payments)
Using this formula, you can calculate the maximum amount you can reasonably afford to borrow for your mortgage. It is important to note that this is not the maximum amount you will be approved for, but it is an indication of the amount you can comfortably afford.
Once you have calculated the maximum loan amount you can afford, you should take into account any other potential costs associated with purchasing a home. These costs include stamp duty, legal fees, removalist costs, and any other associated costs.
Stamp duty is a state tax that is charged when purchasing a property and it varies from state to state. It is important to factor this into your calculations when budgeting for a mortgage.
Finally, it is important to take into account any potential changes in interest rates over the term of the loan
Make a Budget and Stick to It
Making a budget and sticking to it is an essential part of the first time buyer’s journey. It’s important to think of your budget as a plan, and to have a clear idea of how much money you have to spend on your mortgage, bills, and other expenses.
Once you’ve decided on a budget, it’s important to stick to it. This means taking a hard look at your income and expenses and making sure that your budget reflects your current financial situation. You should make sure that your spending doesn’t exceed your income, and that you’re saving enough to cover any unexpected expenses.
When making a budget, you should consider all of your monthly expenses, such as rent or mortgage payments, utilities, groceries, car payments, insurance, and other bills. It’s important to factor in any additional expenses that you may incur in the near future, such as a wedding or a holiday. You should also account for future savings, such as for a deposit on a house or for retirement.
It’s important to remember that budgeting isn’t only about cutting back on spending. It’s also about making sure you are making the most of your money. Consider setting up an emergency fund, or an account for a specific goal such as saving for a house. You should also look into ways to reduce your monthly expenses, such as negotiating better deals on bills or energy suppliers.
When making a budget, it’s important to remember that it’s not set in stone. Life can be unpredictable and your budget needs to be flexible enough to accommodate any changes. It’s also important to remember that budgeting is an ongoing process, so make sure to review your budget regularly and adjust it as needed.
Consider All Costs of Home Ownership
When it comes to budgeting for a home, it’s important that first time buyers consider all of the costs of home ownership.
From the outset, buyers will need to factor in the costs associated with purchasing a property, such as stamp duty, legal costs and lenders mortgage insurance. Stamp duty is a state-based tax that is payable on the purchase of land and property and is calculated as a percentage of the property’s purchase price. Legal costs cover things like conveyancing fees and the cost of preparing contracts and documents, while lenders mortgage insurance is a one-off fee payable when taking out a home loan with a loan-to-value ratio (LVR) of more than 80%.
It’s also important to factor in ongoing costs associated with owning a property, such as rates and insurance. Rates are levied by local government authorities and are generally calculated as a percentage of the unimproved capital value of the property, while insurance is typically required to cover any damage to the property or its contents.
In addition, buyers should factor in the cost of maintaining and repairing the property. This includes things like regular maintenance, such as painting, plumbing and electrical services, and any repairs or renovations that may be required.
Finally, buyers should also consider the costs associated with living in the property, such as utilities (e.g. gas, electricity, water), internet, and any furnishings and appliances.
By factoring in all of these costs and budgeting for them accordingly, first time buyers can ensure they are in a better position to manage their finances and budget for the future.
Got questions about your home loan? Let's talk
Ultimately, budgeting for a first home can be a daunting task, but it doesn't have to be. At Ello Lending, we are here to help make the process of buying your first home as stress-free as possible. Whether you need help understanding the different mortgage options available or are looking for advice on budgeting, our team of experts are here to help. Feel free to reach out to us with any questions you may have and we'll be more than happy to help in any way we can. Thanks for reading and we look forward to hearing from you soon!
