How to calculate if I can afford property of $xx?

[nathaniel]

I've saved up money together with my partner for about 8 years now, I think we have enough cash in place to try and buy a house a proper house.

The online how much we can afford calculators are usually pretty rubbish so I've been doing some research to see how much a bank's willing to lend me.

So here are the steps,

Work out how much our family spends per month, be as accurate as possible.

Then work out the costs involved in buying a house including stamp duty and various fees.

Let H = house price that you want to purchase. Get a reasonable rate estimate from banks e.g. 2.95% for PI try to get as low rate as possible. If u r a good borrow u might be able to get below 2.95%.

Then tally up your income. And just go "left over" = Income - Expense. Make sure NOT to include rent in your expensive, since once you buy you can move in and don't have to pay rent anymore. Make sure to include in your expenses like council rates, water etc that you normally don't pay if you are renting.

Let loan size = H - cash - stamp duty - other fees

In Excel, do =pv((rate+3%)/12, 1230, left over)). Notice that I have assumed a 30 year loan her so if you want a 28 year loan then replace 1230 with 12*28. Also, I think banks are required to assess your borrowing capacity by checking if you can still afford the loan if interest rate go up by 3%, hence why there's a 3% in my equation.

The above will give you your maximum loan size so you can recover H from this formula

Let loan size = H - cash - stamp duty - other fees.

Whatever value comes out, should be the maximum house price you can afford. Just adjust accordingly for some conservatism.

Is this the right way to approach this?

 

[anthonyadrianbell]

@nathaniel You are over complicating it.

Go see a mortgage broker, give them your info, and they will tell you how much you should be able to borrow.

Simples .

 

[mikec508]

@anthonyadrianbell agree, the mortgage broker will list a bunch of first years fees you may not have considered e.g house insurance

however, its good to know your "income - expenses" figure. Not sure how it is now, but I was nominally approved to borrow more than what I thought I could pay back.

 

[lexgrl]

@mikec508 Agree. CBA offered me 7x combined (wife and I) gross income which when I calculated monthly repayments off that, I just couldn't see how I wasn't going to be eating 2 minute noodles and baked beans for the next 25 years and getting an ulcer from the worry of it all. This is how people get in trouble, banks still offering way too much.

 

[resjudicata]

@lexgrl The CBA lender I saw said they didn't like to give people a number because they'd get excited by that and throw their budget out the window.

I have no idea how much they were prepared to lend me and I really don't care.

 

[lexgrl]

@resjudicata I usually go with a broker I haved used for over 10 years but due diligence needed to check the pricing he was offering hence why I spoke to CBA with no intention on using them. The broker got me 5.5x which I was comfortable with.

 

[667083]

@nathaniel How many times you have to multiply your total income to obtain the house price?

For example a loan of $350,000 on a $100,000 total income becomes a 3,5x which is very affordable.

A $1m loan on a $50,000 becomes a 20x which is not affordable.

This works well on a quick glance but doesn't take into account many other circumstances (for example number of children or high cost of living vs low cost of living areas).

 

[tiavina]

@667083 This is a great answer and exactly what we did last year.

We tool our household income and used a multiple of that (4x) to work out our maximum. We wanted something in the range of 3x to 4x. In the end we settled at 3.2x for our place, though the bank offered us up to 7.5x.

We didn't want that sort of mortgage- I'm almost 51, my wife 44. We've got really good superannuation- but I didn't want to hand over a chunk of that in years to come just because we were still carrying a mortgage.

IIRC, in the days before lending restrictions were loosened, this was the approach and range banks used to assess borrowers. Your point on adjusting for individual factors (age, childcare, location etc) is spot on.

 

[resjudicata]

@tiavina

Your point on adjusting for individual factors (age, childcare, location etc) is spot on.

My lender was great and asked about other financial goals that I had (such as further study, weddings, travel etc).

Said I still wanted to continue to travel overseas and had factored a $10k/year travel budget into my overall budget.

Same with not wanting to give up my gym membership, hair appts, boutique gin distillery purchases etc. Happy to live in a smaller place to still maintain my somewhat modest lifestyle.

 

[godywife]

@nathaniel I believe banks will take the higher of your expenses or a number obtained using the Household Expenditure Method (HEM). So if you're very frugal, they will assess you at spending more than you actually do. I think the number is based off where you live, how much you earn, and whether you have a partner /dependants.

I also find this calculator works quite well of you know your parameters: https://moneysmart.gov.au/home-loans/mortgage-calculator

 

[lexgrl]

@godywife Yes this is correct. I spoke to 2 lenders that set my annual expenses at 50k on my application. They had my bank and credit card statements for the last 6 months, it would have been very easy for them to confirm my actual spend of 30k p.a. but that was too low for them.

 

[nathaniel]

@lexgrl It doesn't pay to be frugal

 

[resjudicata]

@nathaniel The way I did it

• Already had an excel spreadsheet going with my current expenses and savings goals
• Added in estimated house insurance, body corp (I was looking at units/townhouses) and rates to my spreadsheet.
• Using the spreadsheet and the added expenses worked out what sort of repayments I'd be comfortable paying whilst still meeting my other lifestyle goals.
• Played around with loan repayment calculators to see what amount loan those repayments would service.

Bank never told me my borrowing power - lender said they don't like to do that because then people throw their budget out the window.