That house you’re looking at purchasing may end up costing you more than you think. Here are my tips to avoid future house heartbreak.
Today we’re seeing some stratospheric prices, particularly in Melbourne and Sydney, regarding purchasing a house. If anything, this should get people to think even more closely about what is and isn’t affordable.
So, what should you think about when assessing the cost of your new home?
The income to mortgage ratio.
Let’s look at some metrics and, historically, what metrics are used to measure your ability and affordability of a house.
A perfect first measure is your yearly income against mortgage (or income to housing expense). Calculating this helps you work out how much you’re going to spend on the mortgage and if you can afford it.
Generally, and historically, a mortgage is three to four times your income.
If you have an annual salary of $100,000, you should afford a mortgage of $300,000 to $400,000. That’s 3–4x.
But that may mean you can buy a $500,000 house.
Because you should have a 20% deposit-that’s $100,000. You need $400,000 more; so, your mortgage will still be 4x your annual income. You should feel relatively comfortable with that. That’s based on historical numbers.
Now, it’s a little bit different because interest rates are so low, and a house costs a lot more.
Another way to look at it is your income to the monthly mortgage payment. That, again, is about a 30% ratio. So, if you have $1000 income monthly, you should be paying $300 a month in mortgage.
The other metric to look at is total debt to income.
So, you get yourself a mortgage. You use the 3x to 4x ratio. You’ve got your $500,000 house. You put your 20% down. Now you’ve got a $400,000 mortgage.
But you need to think about, can you service that?
You may not just have a mortgage. You may have a credit card. You might have six credit cards. You may have a personal loan. You may have got the mortgage then because you were so happy, you’ve gone out and bought yourself a beautiful car to park in that new driveway.
The general rule of thumb for total debt to income is about 40%.
So, your monthly expenses on debt (cars, credit cards, store cards, personal loans, and your mortgage) all lumped together should come to around 40%. No more. If it’s about 50%, for example, you’re getting into an uncomfortable area.
They’re some metrics to look at. I encourage everyone to dive down into their income and expenses, look at these metrics, and apply them to your finances before you try and get a mortgage.
What else should you consider when buying a house?
There are many, many things to consider when buying a house.
But here’s the top 5.
Don’t trust the estate agent.
You walk in, and you tell the estate agent you’re preapproved for your mortgage. They look very excited because you’ve preapproved to spend, say, half a million. You’ve got a good income; you’re ready to go-you’re the estate agent’s dream buyer.
But you need to know that the estate agent is not on your side.
That agent is working on behalf of the seller and themselves. So if they can sell that $500,000 house for 1 million, they will because their client will be happier, and their commission will be higher.
I was at a business meeting where I heard an estate agent bragging about this very point. I think this is unconscionable, but it’s what an estate agent does. It’s their job. They’re there to help you get a house, but they represent the seller, not you, the buyer.
Don’t buy the most expensive house in the neighbourhood.
The most expensive home is usually the ceiling; it will still grow in value, but only at the rate of inflation.
Where you want to be is in the middle. You can add improvements and do all the things you want to do with your house. You can improve the quality of your home, and the cost will go up, but if you’re the most expensive house, you get compression.
There’s a limit to how much your property will rise in that value because you are the most expensive in the neighbourhood-you’re the benchmark.
Get a house inspection.
A lot of people miss house inspections. They see the house online, do the virtual walk-through, and know it’s the one for them.
But spend that little bit of extra time getting somebody to come in and do a once-over.
Even if you go to the walk-through of the home, you still need to hire a professional to do a once-over. They should be unbiased and unbiasedly working on your behalf.
They’re the one individual that is looking for your best interest. The bias that the house inspector has is to make sure you get value.
A quality inspector will tell you what’s wrong or right with the house; they’ll find anything that may be hidden to the average eye.
Consolidate your debts into your mortgage.
I recoil when I hear people have multiple forms of debt.
If you have a mortgage, you shouldn’t have multiple forms of debt. Unfortunately, it happens, and I get it. But if you can avoid it, and 90% of the time, you can consolidate your debt.
Once you have a mortgage, you should not have multiple credit cards and personal loans.
One of the best values I can give to a client almost instantly is to consolidate their debts. I saved somebody $1000 a month from just consolidating their debt.
And you can do this yourself; you don’t need me to do it for you.
You don’t need a car loan, and a store card, and a mortgage. You should only have a mortgage, and you can have a line of credit with your mortgage. Perhaps a credit card that you hold within your mortgage. Don’t have multiple forms of debt.
Research the area that you’re moving to.
It’s so easy to go to the council and find out what the development plans are. You can get this from the local council.
You might find that a highway is being built near your new house in the next year. You either a) want that because the highway provides you access to the city or b) you don’t want it because it will be right next door to your new house, and it’s going to be noisy and busy.
But at least you’ll have the knowledge to make an informed decision.
There will be plans for your neighbourhood, so you should check them out. You will get a good idea if this is the neighbourhood you want to move into. So, get those reports.
Related to that is the police. You can get police levels in the neighbourhood to find levels of crime and what crime there is. Usually, it’s not a big deal, but go and do some due diligence. You don’t want to find yourself moving into a former meth house.
When assessing the cost of your new home, remember…
- Save your 20% deposit — you’ll be able to take out a smaller loan to keep your income to mortgage ratio down.
- Your mortgage should be 3x to 4x your income — if you are on a low income, speak to a financial advisor [link] for advice on saving for your deposit and getting into your own home.
- Your total debt, including mortgage, should be 40% of your income — if you have other loans or credit cards, you should get rid of them first.
- Remember that estate agents are not on your side — they work with the seller and will get more money out of you if they can.
- Buy a home with a median valuation for the neighbourhood — you can add improvements to make the house your own and increase the value of your asset.
- Get a house inspection — you can end up out of pocket by buying a house with hidden problems.
- Consolidate your debts into a mortgage — if you can’t pay off your loans just yet, you can consolidate them into your mortgage; the repayments will be higher, but the interest rate will be less than your original loans.
- Research the neighbourhood — check the local council for future developments, and research any past problems like drug busts and police reports.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the direction. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.