Part 1 | General Tips for the process
Based on our experience there are certain things that we recommend you do before even starting to look for your dream home – finding out the mortgage payment you can afford, Getting the services of a mortgage adviser, a buyer’s agent, and finding your lawyer are just some of it. The services of a mortgage adviser and the buyer’s agent are not mandatory but are highly recommended to ease the pain of doing the work yourselves.
First you need to understand that buying house is not always the best option. For some people renting is much more cost effective and helpful in the long run. Owning a house means, you not only are paying higher rent as the mortgage, but there are added expenses such as rates payments, maintenance costs, and sometimes the need to make adjustments. Having said that, I must also say, having your own house means owning an enormous asset; that is never a bad investment. However, the discussion around the decision to buy or not to buy is for another post maybe. For now, I assume you are here because you already made the decision to buy.
1 Our first tip is to find out how much you could comfortably pay weekly, fortnightly or monthly as the mortgage payment. This is only to get an idea about how much you can afford as your mortgage payment.
You can use mortgage calculators given on any bank’s web page to do the calculation (this one is easier to use). The values you need for the calculation are:
- The general interest rate that is currently used (I recommend using the floating interest rate),
- The deposit amount you have, and
- The potential loan value
Different calculators ask for either the cost of the house or the loan value. Cost of the house is how much a house will be sold for. The loan value is cost of the house minus the deposit value. This is the actual amount you will be borrowing from the bank.
E.g.: If the cost of the house is $550,000, and you can afford to have a deposit of $50,000, then your loan value is $500,000.
At this point in the process you may not have a clear idea about any of the actual values for house cost, loan amount or the deposit. Nevertheless, play around with estimates.
A general rule for your deposit is that it should sit somewhere between 10-20% of the house value. So it pays to know exactly how much you can put forward as the deposit before starting this process. There are multiple ways to accumulate a deposit. One is to save rigorously; Secondly, you can turn to parents or close relatives for a donation/gift (this cannot be a loan); or you can explore the grants available through KiwiSaver (or equivalents in your country) for first home buyers (sometimes available for second homes too). In reality, your deposit may have to be a combination of savings and either one or both of the other options.
We recommend doing the above mortgage calculation to figure out if you can afford to pay a mortgage at all, and if so within which range. Feel free to play around to find a number or a range, that you are comfortable with. At the end of the day, once you pay off all your bills, other mandatory expenses, and mortgage, you still need to have a comfortable amount left from your salary for emergencies and unexpected expenses.
This information is relevant to the New Zealand context. but you can apply the fundamental idea in any context.
Tell us in the comments below how the process goes in your country. Would love to hear more.
Stay tuned for the next tip in the series – Should you use a Mortgage adviser?
Photo credit: http://www.interest.co.nz