What Can You Comfortably Afford as a First-Time Home Owner?

Moneymagpie Team 10th May 2023 No Comments

Reading Time: 5 minutes

Buying your first home is one of life’s most exciting and rewarding experiences, but it can also be quite daunting, especially when it comes to figuring out what you can comfortably afford. Many factors go into determining how much you can afford to spend on your first home, including your income, expenses, debts, and credit score amongst many other factors. To ensure that you are not overstretching your budget or setting yourself up for a rocky financial future, determining what you can comfortably afford as a first-time homeowner is crucial.

If you are unsure of where to start, you’ve come to the perfect place. Today, we explore everything you need to know about arriving at a first homeowner’s budget that’s best for you, so read on to find out more.

Consider Your Income
Round Up Your Monthly Expenses
Don’t Forget The Additional Costs
Determine Your Deposit
Look Into Government Support
Get Pre-Approved For A Mortgage

Consider Your Income

Unsurprisingly, one of the first things you should consider when figuring out a comfortable budget for your first home is none other than your income. First and foremost, you’ll want to make sure that your monthly income is enough to cover all of your living expenses, as well as your mortgage payment. As a general rule, your mortgage payment should not exceed 30% of your gross monthly income. For example, if you earn $5,000 per month, your mortgage payment should be no more than $1,500 per month. This rule is known as the front-end ratio, and it is used by banks and lenders to determine how much they will lend you for a mortgage. To give you a clearer picture of how much you can afford, it is always a good idea to use a loan repayment calculator that will allow you to run the numbers to understand your monthly repayments.

Round Up Your Monthly Expenses

In addition to your income, you’ll also want to take a look at your expenses when deciding on how much you can comfortably afford as a first-time homeowner. It’s important to factor in all of your monthly expenses, such as utilities, groceries, transportation, and any other bills or expenses you may have. Once you have tallied up exactly how much of your income is funnelled into expenses each month, you’ll want to make sure that you have enough left over to comfortably cover your mortgage payment. If you don’t have enough leftover for your mortgage, you may want to consider purchasing a smaller or less expensive home in a different area.

Alternatively, evaluate your expenses and see if there are any areas where you can cut back. Consider reducing your grocery bills, or cancelling any subscriptions you don’t use. Remember, it’s important to not stretch yourself too thin when it comes to affording a mortgage. Buying a home is a long-term investment, and you don’t want to put yourself in a situation where you’re struggling to make ends meet each month.

Don’t Forget The Additional Costs

When calculating how much you can afford, it’s important to factor in additional expenses that come with homeownership. Some of these expenses include property taxes, homeowner’s insurance, council rates, strata fees (if you purchase an apartment, townhouse or unit), utilities, maintenance and repair costs. Taking additional costs into consideration is essential because these expenses can significantly increase the cost of owning a home beyond just your monthly mortgage payment. Failing to consider these additional expenses can lead to financial stress, making it difficult to maintain your home and meet other financial obligations. If you have done your calculations and find that you are struggling to keep up with the costs, it may be a good idea to look at an alternative home that is more affordable and easier to manage financially.

Determine Your Deposit

Another important thing to take into consideration when figuring out how much you can comfortably afford to spend on your first home is your deposit. The minimum deposit required by most lenders in Australia is 5% of the purchase price of the property, but some lenders may require a larger deposit, depending on the borrower’s financial situation and the type of loan they are applying for. A larger deposit means you’ll need to borrow less, which means you’ll pay less interest and potentially lower monthly repayments. Usually, 20% of the full value of the house is a good amount to aim for as a deposit. For example, if you’re purchasing a home for $500,000, a 20% deposit would be $100,000 upfront, and the remaining $400,000 would be financed through a home loan. In addition to the deposit, there are other costs associated with purchasing a home in Australia, including stamp duty, legal fees, and lender’s mortgage insurance (LMI) if your deposit is less than 20% of the purchase price. These costs can add up quickly, so it’s important to factor them into your budget when considering how much you can afford to spend on a home.

Learn more about saving for a house deposit here.

Look Into Government Support

When determining how much you can afford on your first home, exploring all the different avenues for financial help is always a good idea. The good news is that the Australian government offers a one-off payment that can be made to first-time home buyers (First Home Owner Grant), helping them enter the property market. To be eligible for the FHOG, you must meet certain criteria, including:

Being a first-time homeowner or a person who has not previously owned a property in Australia
Purchasing or building a new home that has not been previously occupied
Meeting residency requirements
Meeting income and purchase price thresholds set by each state and territory government

The amount, criteria and details for a First Home Owner Grant vary from states and territories, so check with your lender or have a look at the Federal Government’s First Home Owner Grant site for more information. By taking advantage of the FHOG, first-time homeowners can achieve their dream of homeownership more easily and affordably, and potentially benefit from the positive effects on the housing industry.

Get Pre-Approved For A Mortgage

Last but not least, getting pre-approved for a mortgage will give you a clear idea of how much you can afford to borrow based on your income, expenses, and credit score. This invaluable step can help you narrow down your property search and ensure that you’re looking at homes that are within your budget. Moreover, having pre-approval also gives you the confidence to make offers on homes, knowing that you have the financial backing to secure the loan. This can help you act quickly in a competitive market and increase your chances of securing the property you want.

Learn more about the documents needed for home loan pre-approval here.

At the end of the day, determining how much you can comfortably afford to spend on your first home requires careful consideration of your income, expenses, deposit and mortgage pre-approval. By following these six steps, you can create a budget that allows you to purchase a home that you can afford and enjoy for years to come. Remember to be realistic and conservative with your budget, and seek the advice of a financial professional if you need additional guidance.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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