How much should you spend on your first home?
Buying your first home can be nerve-wracking, exciting and exhausting all at the same time. When working out how much you can afford to spend on your first home it can be tempting to view houses that are at the very top of the maximum figure you are allowed to borrow. Is this really wise though? One bit of parental advice that has stuck with me all of these years is that you should buy the best that you can afford. When it comes to buying a house though, what you can truly ‘afford’ can often become distorted to mean the maximum amount that a mortgage lender says you can ‘afford’. So what factors should we consider when deciding on a budget for our first home purchase?
Quality of Life
Sure it can be great to have a fantastic house in an enviable location. If in order to afford this dream house however it means that all you can afford to do is sit inside it, eat bread and drink water then is it really all that great? Buying a home and taking on a mortgage is a huge step and it can often be accompanied by a slightly decreased standard of living as you spend an increased amount on your new mortgage coupled with the inevitable outlay of making your new house a home and then maintaining it. How much of a decrease in lifestyle you are willing to accept is of course up to you, but it is certainly something that needs to be considered.
When working out how much you can really afford to budget on a monthly basis for mortgage payments then, be sure to leave a little room for enjoying life too. Yes by getting a mortgage you are investing in your future and yes this may mean you have to sacrifice a 24/7 party lifestyle as a result but this doesn’t mean that you have to mortgage yourself up to the hilt and give up on enjoying life completely.
Future Interest Rates
We all know that interest rates are at an historical low at the moment but they are not going to stay that way forever. So what happens when you come to remortgage your new home in 2, 3 or 5 years’ time? Sure you may be able to comfortably afford the repayments now but could you afford them if interest rates were to rise 2, 3 or 4 percent? Such a small fluctuation in interest rates could affect your future mortgage payments by hundreds of pounds per month, so again it’s an important thing to consider. I think most people would agree that a ‘normal’ level of interest rates would sit somewhere around the 5%-6% mark, so why not take a moment to work out how interest rates at this level might affect your mortgage repayments in the future?
What happens if?
I know that if we only think of every negative thing that might happen at some point in time then nobody would ever do anything. This being said though, I still think it’s worth considering what your financial position would be like in the event of a job loss, an unexpected addition to the family or some other life event of this sort. Does your mortgage budget allow room for any of these life events? Is there room in your maximum budget for an emergency fund to see you through events like these? If not then perhaps it could be worth reducing your expectations and revising your budget.
Borrow what YOU can afford, NOT what the bank says you can afford
Just because you have a stellar credit score enabling you to borrow up to 5 times your salary it doesn’t always mean that this is a wise move. Instead it would be better to sit down and think about what you can truly ‘afford’ in order to at the same time live some kind of a normal life. Yes there may be sacrifice involved in order to buy a nice place in a nice area but how big will this sacrifice be? Will you still be able to live a happy and enjoyable life? If an honest look at the figures says that you won’t, then perhaps a slight reduction in budget may be in order.
You may have a £20,000 credit limit on your credit card but that doesn’t mean you have to spend it all, does it? You may be entitled to a £30,000 car loan but does that mean you should buy a £30,000 car? In the same vein then, just because a bank is willing to lend you up to five times your salary this doesn’t mean that it would be always be wise to buy a house for this amount. Instead, why not give some thought to just how much financial pressure this level of borrowing would place on your current or future finances and then borrow what YOU can afford to borrow and NOT what a bank says you can afford.