Most of us dream of one day owning our own home. Joining the property ladder, choosing your ideal location, and truly making it your own; there’s a lot to want.
However, getting to the point of home ownership takes a lot of effort. Not only must you determine the right time to buy, but you ideally would have all your financials in order many months prior.
In addition to just living your life, budgeting for a house can seem like a daunting task. But it doesn’t have to be. Allow us to help you visualise the reality of home ownership, with our guide on budgeting for a house.
Let’s take a clear, simple look at everything you’ll need to account for in your new house with this new home expenses list:
The most widely known cost for a mortgage revolves around the deposit. Deposits are needed to calculate the exact loan-to-value ratio (how much you borrow) of your mortgage. The higher the deposit you pay, the lower your monthly mortgage costs.
After the deposit comes the mortgage. Mortgages cover the cost for the entire house, with most homebuyers needing to take one out.
Stamp duty is a form of tax that’s payable when buying a house. In Wales, stamp duty is applicable to any home sold over £225,000, whereas it’s set at £250,000 in England and Northern Ireland. Different regions call it different things, like Wales for example refers to it as Land Transaction Tax, and Northern Ireland calls it Stamp Duty Land Tax.
Although, there is some good news for first time buyers when it comes to stamp duty. When buying a first home, buyers are entitled to a stamp duty relief scheme that negates any fees for houses sold under a £425,000 threshold.
Scotland pays in a slightly different way via the Land and Buildings Transaction Tax, with the Scottish government setting its own rates. The threshold for this currently sits at £145,000.
Homebuyers are heavily advised to take out building insurance on the property they wish to buy prior to the date of completion. This insurance isn’t a legal requirement, but most mortgage lenders would see it as being compulsory. The same goes for contents insurance.
Before thinking about things like deposits, mortgage fees, and even locations, you’ll need to have a strong grasp on your current in and outgoings.
Only after you have a clear picture of your financial situation will you be able to accurately determine the kind of house you can buy, which paves the way for the deposit you place, and where you can look.
We highly recommend a spreadsheet at this stage – they’re excellent for automatically adding and subtracting as needed.
In one column, place your income. Then, in another column, add your monthly outgoings. Think of things like mobile phone bills, utility costs, entertainment subscriptions, eating out, groceries, childcare, rent, car payments – everything you can think of that goes out on a usual basis, drop it in here.
Then it’s just a case of subtracting your outgoings from your income. Ideally, you would have a small pot of money left over to account for emergencies, as well as replenishing your savings.
While doing this, you could go one step further and break down your outgoings into luxuries and necessities. This will help you figure out where you can make cuts, and it is especially useful if you’re not happy with the amount you have left over every month.
Now that you have an accurate picture of your financial situation, we can really start drilling down into specifics.
When buying a house, the rule of thumb is that you’ll be able to borrow around 4x your annual salary.
So, if you earn £20,000 a year, you can borrow £80,000. For those earning the current UK average income of £33,000, you can borrow £132,000. Now, this does restrict the types of houses you’re able to make an offer on, but it’s always good to know when deciding upon your options.
Buying a house goes much further than these initial calculations, though. It’s generally advised to ensure your monthly mortgage payments account for no more than ~30% of your post-tax income. If your monthly income is £1,800, your mortgage should cost around £540 (or less) to leave adequate space for other expenses.
Deposits are by far the greatest obstacle that many first-time buyers face when buying a house.
Generally, deposits tend to stand around the 10% mark. This means that if your house is valued at £180,000, your deposit will be £18,000. This then leaves you with a mortgage costing £162,000, at a 90% loan-to-value ratio.
While there are options to pay a lower deposit in favour of a higher mortgage, 10% tends to be the sweet spot that most buyers aim for. At that point, the deposit is achievable enough to offset the mortgage while still making it affordable.
Remember, buying a house is full of uncertainties. A lot of those uncertainties come from the physical building itself, rather than administrative procedures.
Although your estate agent and solicitor will endeavour to find out as much as they can about a property before you move in, sometimes, problems will only present themselves once the keys are in your hand. These issues could range from missing floorboards to major wall repairs, so it’s important to keep them in mind with your budgeting.
It’s recommended to keep aside around 1%-4% of the value of your property for these kinds of repair tasks. So, for a home costing £200,000, you should aim to keep £2,000 aside for maintenance. This amount won’t cover larger repairs, but it can help with fixing the odd issue that arises.
No matter where you are in the home buying process, whether you’re only just starting to think about buying, or if you’re near enough ready to purchase, it’s always good to be aware of the costs involved.
For more guidance on the costs of home ownership, have a read through our article on the hidden costs of home ownership. Some of them may surprise you. And, for anything banking-related, stick with Aldermore. We’ve got mortgages to suit all sorts of needs, and savings accounts to help you reach your financial goals.
Subject to status. Your mortgage is secured on your property. Your property may be repossessed if you do not keep up repayments.