Can you afford to buy?

Buying a house can be a nerve-wracking process as for most people it's the biggest investment they'll ever make. However, as Saul Geffen of MortgageSA says, there's no need to panic if you ask yourself these six simple questions first.

Is the location of the home right?
It's often said that there are only three things to consider when buying property — location, location and location. The old adage still holds true, says Geffen.

"Your property should be an investment which will continue to grow in value in the years to come. So buyers should always look at the surrounding areas — what sort of infrastructure is there, where are the nearest schools, how good or bad is the security? You must consider all of these factors before putting in an offer, as they will be considered when assessing the value and the potential return on investment when you eventually sell your home."

How big a deposit do I have to put down?
Buyers should also consider the loan-to-value ratio — in other words, how big a percentage of the home's value they have available to put down as a deposit. This deposit is the equity one is willing to invest in the property, offset against the total amount of the home loan.

Geffen suggests that "It is a good idea to try and put down 20 percent as a deposit, as the bank will typically grant you a higher rate of concession than if you invested only 10 percent. It's also worth noting that you are not always obliged to put down a deposit. Some banks are happy to cover 100 percent of a bond plus costs — however, this will impact on your interest rate discount."

How do the repayments compare to my salary?
It's also important to consider the repayment-to-income ratio to determine whether you can really afford to keep up your loan repayments and aren't setting yourself up to default. Geffen says that MortgageSA typically advises that the buyer's mortgage repayments should not exceed 30 percent of their gross monthly salary.

What are the transfer costs?
You should also ensure that you have made provision for transfer costs — forgetting these can be a costly error for any home-buyer as they are an important factor in determining whether you can really afford the home. Typically, transfer costs will equate to eight percent of the total mortgage value — a sum that needs to be taken into account when calculating your initial investment in the property.

For how long will I be paying off my bond?
A 20-year (240 month) repayment term for a mortgage is fairly standard amongst most lenders. Buyers should be aware that they can negotiate for longer or shorter terms. "But," cautions Geffen, "this can affect the total cost of the mortgage in terms of interest paid over the long term. It should also be noted that some lenders will not grant bonds to buyers who may not be economically viable for the full 20 years — in other words, those who are close to retirement age."

Will I have to take out insurance?
Lenders will always require that their liability is protected, and will insist that you take out homeowners' insurance. In those considered more high-risk cases they may also insist that you take out life cover as a condition for granting the mortgage. These obligatory costs must be factored into your monthly repayments when you calculate whether or not you can afford the investment.

Online resources centres can also be a good source of support, and can help buyers assess the financial implications of buying a home. Amortisation, transfer cost and affordability calculators, have been designed specifically to help buyers identify the various scenarios they may face, and work out how much flexibility they have should any of these factors change. These are available on banks’ websites and on the MortgageSA homepage.