How much house can I truly afford?

When deciding on a price bracket, most buyers will find out how large of a home loan a bank will offer and use that as their house hunting budget. But is this the most effective way of setting a budget, and if not, what should we be doing instead?

Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa says that although this is not entirely a bad strategy, buyers should also ask themselves how much they ideally want to be spending on a home each month instead of asking what is the maximum they can afford (especially now that interest rates are as high as they are).

“It is relatively simple to find out how much you can qualify for in home finance,” says Goslett. “Buyers can do so by using an online bond calculator or by getting a pre-approval certificate through a bond originator like BetterBond.”

However, he notes that it is often much trickier to decide how much you ideally want to spend on a home each month, which is why many tend to overlook this step. “The bank will only consider your fixed monthly expenses, but they don’t really take into consideration your nice-to-haves, like the takeaway coffees you like to buy on the way to work or the spontaneous weekend away that happens every other month or so. These small lifestyle expenses can add up, so it is important to think about this carefully before taking out the maximum line of credit that is offered to you,” says Goslett.

Of course, Goslett acknowledges that buyers might be happy to cut back on their expenses if it means owning the home of their dreams, but he also notes that it is important to realise that they are making these kinds of sacrifices ahead of time, otherwise it can be a bitter pill to swallow when there is no money left for life’s small luxuries once the debit orders go off.

To work out how much a buyer can truly afford, RE/MAX of Southern Africa shares the following tips:

• Calculate your debt-to-income ratio to see how much of your income is already committed to debt payments. The money leftover is now your base amount to work out how much you want to pay on a home loan.
  Top tip: are there any debts you could pay off quickly to free up more income?
• Work out how much money you typically spend on lifestyle expenses (consider things like birthday presents, entertainment costs, hair and beauty expenses, etc.) These amounts vary each month, which is why it can be tricky to work out a budget for these items.
• Consider your priorities. For example, if travelling is important to you, then it might bring you more joy to compromise on the size of your home than to compromise on your ability to afford getaways.
• If all else fails and you’re not sure where to start, a common guideline is that your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (including housing costs) should not exceed 36% of your gross monthly income.

“A home loan is a long-term financial commitment, so you want to be sure that you are comfortable with the repayment amount before you sign on the dotted line. It might require some sacrifices or trade-offs to afford your dream home, but it can also bring greater financial freedom in the long-term for those who diligently keep up with their repayments and allow house prices appreciation to work in their favour,” Goslett concludes.

Writer: Kayla Ferguson