Purchasing your first home is a big step and, for many people, represents the most significant financial commitment they will make during their lifetime.
Although it is a time of excitement, getting your first mortgage can also be stressful as the realisation sinks in that you are now making a major financial commitment that is ongoing. If you’ve become comfortable with the idea of saving a little from each pay packet this can seem daunting but it’s important to recognise that although the days of growing your bank account may be coming to a temporary end, you are working towards building your future and acquiring an asset that will be a stepping stone to your wealth plan.
Getting your first mortgage is a balancing act between buying the best property you can and coping with the realities of what you can afford. It can be tempting to over extend but aside from the affordability factor there is your level of comfort with debt. You won’t enjoy your new home if the stress of the mortgage is keeping you awake at night, and nor will it be pleasurable if the repayments are forcing you to make sacrifices in other areas of your life.
The most useful tool for helping you determine what you can afford is a mortgage calculator. Most of the financial institutions will provide one on their website – you will also find one on ASIC’s Money Smart website.
By inputting your details you can work through the best scenarios for you. The two most important factors are the amount of mortgage you can afford to service and the amount of deposit you can contribute to the property. These are the two primary considerations any lender will assess you on. The calculator will allow you to input the amount of your prospective mortgage showing you your likely repayments, or alternatively, you can input the payments that you can afford and it will show you the level of mortgage (and hence the value of the house) you can be looking for.
As an example Steve and Jane have saved up a deposit of $110,000 and are looking to purchase their first home. Their combined income is in excess of $120,000 and each month they have been putting aside $2,500 towards savings. They have decided that they can afford to put this amount towards their mortgage instead and are looking to see what they can afford on this basis.
Working through the calculator they input their monthly desired repayments of $2,500 and allow an interest rate of 4.5% (we’ll discuss this in more detail below). They allow for a 25 year mortgage. Based on these sums the calculator tells them they can borrow $447,977. Assuming they don’t wish to borrow more than 80% and attract the added cost of mortgage insurance they work out that $447,000 will enable them to look at a property in the area of $550,000. With their deposit of $110,000 they know they are able to afford the difference of just over $100,000 in this particular case and still have enough to cover their purchasing costs.
In this example Steve and Jane have worked on an interest rate of 4.5% however it’s important to understand that the variables you use will change over time. Current interest rates are historically low and they would need to ask themselves whether using this rate is realistic over a 25 year period. There is also other uncertainties to deal with such as job security, will they have children, what increases in income they might expect over a 25 year period, do they see themselves having to upgrade if a family comes along and a myriad of other factors.
These are all beyond the scope of a simple calculator. However, a professional financial advisor can work through the various scenarios that are possible and make you aware of all the factors you should consider, including some you may not have thought of. They will also provide you with suggestions on ways to protect yourself should the worst happen and your mortgage becomes a burden to great to handle.
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The information provided is intended as a guide only and does not take into consideration your personal situation, needs and objectives and should not be considered as advice of any nature.