Before you buy a home you need to know the full cost - and we are not just talking about mortgage repayments here! Yes, the mortgage is the most obvious and high profile cost of home ownership and usually is by far the largest one. But don't forget about rates, insurances, water, repairs and maintenance! So just how much is this all going to cost?
The mortgage is usually the first figure calculated - and often dictates what the house buying budget is for many people. The biggest thing to consider here is the potential effect of an interest rate change. Currently interest rates are low, this almost certainly means that in the future your mortgage repayments are going to be higher. A good way to see the effect a change in interest rate has on your mortgage repayment is to have a play with a mortgage calculator - put in a variety of interest rates and see the effects. Here are some statistics for average bank 2 year fixed home loan interest rates that give you some numbers to play with:
Current 2 year fixed home loan rate = 7.1%
Average home loan interest rate for last 5 years = 8.0%
Home loan interest rate mid 1998 = 10%
Home loan interest rate April 2008 = 9.6%
Home loan interest rate May 2003 = 6.7%
With costs such as rates, insurance, and water you will be able to find out the exact amount these will be for the first year at least. These will go up year on year, sometimes by an amount far exceeding inflation, so factor this in. If you budget for an increase of 10% every year for these bills you are unlikely to be caught short.
As a bare minimum you should allow $1,500 or better yet 0.3 - 0.5% of the value of your house per year for maintenance. This does vary widely depending on the age, size and condition of your house and the building materials used. You may not use all of this maintenance money one year, and then have major expenses the next! But it will average out over time. Maintenance cannot be avoided, so budget for it!
Something you may not have thought about is all those extra bits and pieces that you are going to need to buy for your new home - new furniture, new appliances, what about plants for the garden? And are you planning any renovations?
How much you want to spend on renovation and new things for your house and grounds is up to you, but there is no doubting you will want to spend money, so establish a budget.
So when you work out how much you can afford to pay for a house, remember to add on all those extra expenses! A good rule is to add another 20-30% to your mortgage repayments to cover rates, insurance, water, small improvements, new stuff, and repairs and maintenance.
Ultimately you will have to come up with the money for all these extra things from somewhere - so take this into account when you are working out how much you can afford in repayments.
This information is part of the Propertytoolbox mortgage & money guide - This guide contains heaps of good info about the money part of home buying. Read more here.
