A guide to determine how much house I can afford

Buying a home is both exciting and stressful - determined by an infinite number of factors that vary depending on the lifestyle you want or the needs you have. However, everyone’s journey starts at the same place - how much you can afford to spend on a home.  

Maybe you have created a range of what you are willing to spend - however, what you are willing to spend and what you can actually afford doesn’t always line up. All too often buyers end up buying a home that in reality is too expensive and they end up relying on credit to make ends meet at the end of the month.

As this is one of the biggest purchases of your life, one of the most important financial questions you have to ask yourself is: How much house can I really afford?

Below we have set out four steps you should take to determine how much you can afford before you start your house hunt.

Step 1: Get Prequalified for a home loan

Imagine falling in love with a property after many months of searching. Picture the immense joy of discovering that your offer has been accepted. Now, imagine what it would feel like to have the rug pulled out from under you when you realise that you cannot qualify for the required home loan amount. The disappointment of losing out on their dream home often leaves homeowners unwilling to continue the search, delaying or even grinding the process to a halt altogether.

While acquiring pre-bond approval might seem like an unnecessary item of admin that you simply do not have the time for, buyers are regularly surprised by what they thought they could afford and what the banks would grant them when it finally reached that point in the process.

Financial institutions provide a pre-approval facility that allows consumers the opportunity to discover what they can truly afford. Consumers can either apply at banks directly or they can use a bond origination service.

Step 2: Calculate all the costs associated with your new home

Keep in mind that the bank will give you a loan based on the number of monthly payments they determined you can afford - your debt-to-income ratio comes into play here. They are not taking into consideration all the new expenses you will have with your new home. You will need to calculate these costs to determine how much you will be needing every month apart from the loan repayments. 

Costs for basic utilities such as electricity and water, maintenance, and improvements if the house needs some work should also be determined. If your new house is in a sectional title complex you will need to add the monthly levies as well, if you are upgrading to a free-standing home you will need to calculate the expenses of things that were covered by levies previously.

Step 3: Time for a serious budget review

If you don’t have a budget or you are not good at keeping yours up-to-date, now is the time to really get a better understanding of your spending.

Start by determining all your income sources and totalling these amounts into one number. Once you have this number, use your bank statements and credit card statements to determine how much you spend on fixed payments (such as car payments, school fees, medical aid, etc) and optional spending (everything that you don’t pay a fixed amount on every month) List all the fixed expenses, and the average you've spent on them for the past three months. Categorize each optional item in groups such as food, transport or petrol, entertainment, clothes, baby supplies, household, travel, transportation, etc. List each group on your spreadsheet, with the average you've spent on each over the past three months.

You will now have an idea of what you can realistically afford to pay on a home loan. A budget will also allow you to see reckless spending habits that you can adjust to ensure you are in a better position before you start house hunting. 

Step 4: Analyse your situation

You have gotten pre-qualified and you have worked out what your new expenses will be along with your current commitments, now you can sit back and analyse the true amount of how much house you can afford.

Ask yourself if the number you calculated in Step 2 is a realistic number for you - are you overextending yourself a little or will you be able to comfortably afford to pay the amount? Remember that you will want to enjoy your new home and not have to stress every month about bills and payments. Think about your life over the next five years  - are you planning on starting a family? Will the house still suit your needs in five years' time?

The most important part of the process is, to be honest with yourself on what you can afford. Make your new home loan work within your budget, not the other way around.

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