Buying a property usually depends on what you want vs. what you can afford. The latter typically dictates the former. In other words, the vast majority of people will need to tailor their requirements and wants to fit their budget.
There are two things you have to do before determining your budget: work out what property you want and can afford, and how much money you can borrow. To try and help, we’ve put together our advice on buying a home: setting your budget.
Researching your budget options
When preparing to buy a house, one of the first things you should do is work out how much you can spend. This includes cash savings for the purchase or deposit, and thereafter for monthly running costs, including any mortgage payments.
You’re bound to have a rough idea, which you can use to guide your initial search, but there’s nothing like factual information to further refine your thinking. It always advisable to speak to a mortgage broker as early in this process as possible.
There are usually three variables applicable to any property search:
- Size/condition of a property
Most people moving house will be constrained by a financial budget. Therefore, working out your priorities on the remaining two factors should maximise your chances of finding a home you want at a price you can afford.
Do your research thoroughly before you start property hunting. Having all of the facts laid out in front of you will make your life much easier.
Investigate properties you’re interested in and ask yourself the following questions:
- Is it in the right ballpark pricewise?
- Is there enough space?
- What sort of condition is it in? Can you live with it in its current condition or do you need to do significant works to it? If so, can you afford them?
- Is it in the right location?
- Do you have enough cash savings for a 10-20% deposit?
The larger property portals (Rightmove or Zoopla) have ‘sold prices’ sections. These are useful for researching the historic and current values on a property. However, these sites aren’t always accurate, so make sure you look at more than one property to get an average of values in your search area, rather than relying on one property for your information.
How much money can you borrow to buy a house?
It can feel like a lengthy process, but always look to investigate your mortgage or financial options before getting started with your property search. As mentioned above, what you can afford will have a real impact on the type of properties you can start looking at.
Knowing what you actually have to spend will help your decision making. It also lets estate agents know that you’re serious about buying a house. They have to deal with a lot of people who are just browsing. By having your finances in order, you’ll show evidence of serious commitment, which will help set you apart from timewasters.
If you need to borrow money for your purchase, find a reputable independent mortgage broker to help you.
Do your research on this too. Ask friends and family for recommendations. If needs be, speak to one or two brokers to get a feel for how they work.
You could speak to your bank, but you’ll want to get a ‘whole of the market’ picture rather than just the deals from one lender. An independent mortgage broker will usually be well suited to getting you the best rates and terms available for your particular circumstance.
When you find a broker or a mortgage company you want to deal with, you’ll need to provide them with the details of your current financial circumstances so that they can advise you properly. This can feel like a burden and a huge invasion of your privacy, but it’s a necessity, and worth it when you have the keys to your dream home.
Lenders will want to see financial information, including:
- Evidence of income
- All incomings and outgoings of your bank account, including debts
- What you typically spend your money on, as they need to know that you can afford your mortgage repayments
If you’re a first-time buyer, work with a broker or lender to get a mortgage offer in principle before you start your search.
A mortgage offer in principle means that a lender would, theoretically, be happy to lend you the specified amount. This is providing that all the information you’ve given them is correct, and stands up to scrutiny during the full application process.
How to set a budget for buying a house
Once you have an offer in principle from a lender, you’ll be in a much better position to do some research into what property you want. It’s at this stage that you can try and pair what you want with your budget.
Costs to consider when setting your budget include: making sure you have enough cash available for a deposit. If you want to buy a house for £400,000, you’ll typically need a 10% (£40,000) deposit.
Also, ensure you have the cash to pay your stamp duty. This will be due when you complete your purchase. There are tools out there to help you calculate what stamp duty you will be required to pay on your new property. If you're a first-time buyer and the property is under £300,000, you won't be required to pay stamp duty.
When calculating your budget, ensure you have enough money to pay for all legal fees. These will vary from purchase to purchase, but generally include:
- The cost of your legal searches
- Survey costs
- Land Registry fees
- Buildings insurance
- Your solicitor’s fees
It’s also important to double check affordability. Make sure you’re confident you can afford the repayments on any planned borrowing. There is a fine line between stretching your budget to secure a dream property, and overstretching and failing to meet mortgage payments and losing this property.
Ensure you’ve worked out exactly what your current monthly outgoings are, factoring in all your new bills and repayments. If you can’t afford it, don’t do it.
Finally, don’t forget to factor in the cost of moving. Moving house isn’t cheap. If you’re hiring a removals company, expect to pay upwards of £500.
Once all the above is done, you should have a clear picture of the cash you need, and the amount you’re entitled to borrow. When added together, this will give you your maximum purchase budget for your new home.
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