When it comes to purchasing a new property, there are a thousand and one different factors to consider, but one of the most important is how much you can afford to pay. Overestimating your capabilities can have disastrous consequences down the line, which means that it’s incredibly important to get your calculations just right: underestimate, and you may not be able to afford the property you want; overestimate, and you’ll find yourself struggling to cover your mortgage.
So how can you find that happy medium? Most mortgage lenders will perform affordability calculations on your behalf, but as a rule we’d always advise you to undertake some DIY budgeting too. You have to remember that the bank or building society you approach will be working solely on the basis of the information you provide them with, and this often doesn’t create an entirely comprehensive picture. When it comes down to it, the best person to evaluate your spending habits, income, and financial responsibilities is you.
Here are a few tips on the best ways to work out a realistic budget:
Work Out Your Take Home Pay After Tax
One of the simplest calculations you’ll need to perform is how much your household brings in after tax. If you’re employed in an ordinary capacity, you can work this out quite easily as it will be automatically deducted from your paycheck. If you’re self-employed, the process might be a little more intensive, but you should be able to calculate a ballpark figure relatively simply.
Calculate Your Recurring Monthly Expenses
The next thing to do is to work out your recurring monthly expenses. The figure you arrive at should include everything from your electricity bills to the money you spend on food and clothing. One of the best ways to reach a reliable estimate is by looking at your bank statements over the course of the last six months to a year. These will help you figure out how much you’re spending and exactly where it goes.
List the Expenses You’ll Need to Pay When You Become a Homeowner
It’s also really useful to work out how this monthly total will change once you become a property owner, so make a list of any additional expenses you think you’ll incur. These could include anything from mortgage repayments to council tax, home insurance, or the cost of a gardener or renovations. The total you calculate will be no more than an estimate, of course, so it’s often a good idea to add an extra 10 per cent on top just to be on the safe side.
Once you have these three figures totalled up, try adding your recurring monthly expenses to the expenses you’ll need to pay when you become a homeowner. If this figure exceeds your income, then you may have to look at less expensive properties; if your books balance, however, then you know that you’re on the right lines.