Motley Fool Australia

5 signs you can’t afford that house

Sold sign on house with family in the background

A house is most likely the most expensive thing you may ever buy in your life.

According to Corelogic’s March 2019 index results, the median Australian dwelling price is $524,000.

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have all benefited from Australia’s strong housing market over the years.

But anyone signing up to a loan these days has to think hard if it’s the right financial decision considering housing prices are falling. Australian dwelling prices have dropped almost 7% over the past year.

Here are five things to consider when buying a house:

Do you have a 20% deposit?

To avoid paying mortgage lenders’ insurance you need to have a 20% deposit. That means 20% of the purchase price, you also need to have paid for other costs like stamp duty and conveyancing fees.

It is possible to buy a house with a deposit of less than 20%, but that’s a sign that the house might be too expensive. It would be better for the loan to be smaller and the deposit larger if possible.

Will more than a third of your income be going towards repayments

There’s more to affording a house than simply saving a 20% deposit. You need to pay for the other 80% of the loan over the coming decades.

As we all know, there’s more expenditure in a budget than just the roof over your head. If too much of your money is going towards paying for your house then the rest of your budget could be stretched too thin. Of course, you could make it work, but a max of a third of your budget going to loan repayments is a good rule to follow.

Is your price or loan to income ratio below 6?

It’s not a good idea to borrow too much, even if interest rates are very low like they are today.

Banks are implementing stricter lending standards, so you may struggle to get a huge loan like in previous years. But, for example, if your household earns $100,000 a year I wouldn’t want to borrow more than $600,000, or even $500,000. The lower your ratio the more financially conservative and sustainable your debt (or the house price) is compared to your income.

Could you afford a 2% interest hike?

Interest rates are unlikely to stay low forever. Australia currently has record-low interest rates, but one day the RBA interest rate might rise to 3% or 4%.

Mortgages last for decades. It might seem affordable today but what would happen in five years time if the interest rate rose by 2%? Would you be able to afford that? Many households wouldn’t, I don’t expect the RBA to increase rates back to 2% any time soon. It’s just something to think about.

Have you thought about the additional expenses?

It’s not an apple-to-apple comparison to compare your current rental payment to a potential mortgage payment.

There are other costs to consider like water rates, council rates, building insurance and perhaps body corporate expenses. All of these expenses might amount to over $3,000 a year, so your budget needs to be able to cover that increase.

Foolish takeaway

Don’t let any particular point completely sway you away from buying your home, there’s a lot of positives to owning such as potential capital growth, relatively-fixed inflation-free loan repayments, flexibility about what to do with renovations and a place to call your own.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles…

Latest posts by Tristan Harrison (see all)