I would like a beautiful three bed terrace in Mayfair or maybe a futuristic eco-friendly barn conversion in the country. Unfortunately there is something holding most of us back from these dreams and that is a budget. We can't all be millionaires so we must juggle our dreams with what we can realistically afford.
What you can afford really comes down to three things: how much you have in savings, how much a bank will lend you in mortgage and moving costs. Combine the first two amounts and minus the last and that is the maximum you can afford in a house. So lets take a look at these three:
Your savings will be used as the deposit of the house. This must be available to you at the time of sale and will most likely be verified during your mortgage application before you get to the exchange date. It is no use saying you have money you do not as this will be discovered before the sale is allowed to proceed.
If you already own a house, the value of your share of that house (i.e. the difference between your outstanding mortgage balance and the value of that house) will go towards your new home as well.
Your mortgage will cover the difference between your savings and the value of your new home. For first time buyers and those new to ownership, this will be a high percentage of the property value, e.g. 80-95%.
Each lender will have their own set formula for deciding how much you can borrow but since findahood's creator has plenty of experience in this field we can give you an idea of how most of them work in this article on how much mortgage can I borrow?
If you are self employed, earn additional income, have large debts or are interested to read all the details the article mentioned above is well worth a read but if you are a standard employee the amount you could borrow can be calculated by multiplying you and your partners annual income by 5.
These will be more than you were expecting which is the sad reality now days. Solicitors fees and expenses, mortgage valuations, home buyers surveys and removal firms can cost you £2000-3000 but "you aint seen nothing yet"... Depending on the value of the property you will most likely be subjected to a huge fee in stamp duty.
To get more clarity on this please read our article on stamp duty but to put it politely it will cost you a shed load. First time buyers should do their best to stay in the 1% threshold which is below £250,000. After that it is 3% meaning an average house over £250,000 will cost you £7,500 in stamp duty. Houses over £500,000 will cost you 4% meaning £20,000 stamp duty and it just keeps going up from there!
These three components determine what you can afford. Set aside a few thousand from you savings for stamp duty and other costs then add the remainder to that amount a bank will lend you which is usually 5 times your pre-tax annual income. So plan ahead and don't forget about the costs!