House Buying Back to Basics

The biggest purchase most people will make in their lives is the purchase of their home. However, some people find it difficult knowing where to start.

One of our recent queries was from a friend who was tired of renting and wanted to buy her first home. While she had read quite a bit about different mortgages, stamp duty and interest rates, she was becoming increasingly frustrated with information overload! She wanted to know how to get started; the first simple steps she should take in order to start the process. Our advice to her was that buying property is essentially no different than any other large purchase, you really have to start by thinking about the basics. How much can I spend, what can I buy for my money and what am I looking for?

So with this in mind we have come up with three simple steps to getting started:

Step 1: Know your budget

The starting point has to be to assess a realistic budget that you can afford to maintain. The best thing to do is to phone your bank and arrange a meeting, preferably in person or by phone. This will get the ball rolling and give you a chance to ask all the questions that are on your mind. We would recommend making a list of things you want to discuss before proceeding.

All your bank will be interested in is your net monthly income and any outgoings you have. Your bank will then be able to give you a general idea of the size of mortgage you could afford and how much your monthly payments will be.

Step 2 : Know your market

I don't mean detailed research, simply the cost of houses and apartments in the area in which you wish to live. If you were buying a car of course you would know the difference between a Ferrari and a Renault Twingo!

Simply log on to a website such as myhome.ie or propertyfinder.com and get a feel for the prices in your area. Examine the weekly paper to see what you could afford, bearing in mind the information you received from the bank.

Step 3 : Know yourself

As banks become more competitive they seem more and more eager to grant mortgages to house buyers (the US sub-prime mortgage crisis was a direct result of banks lending too much money to people based on what they could realistically afford to repay).

While your bank may tell you that you qualify for a 200,000 mortgage, that does not mean you can afford it! Be realistic in the amount you can repay each month, bearing in mind your current lifestyle and the impact regular mortgage payments will have.

A good measure is 1/3 of your after tax income. You should also consider the effects of interest rate movements on your monthly repayments; if you don't have a fixed mortgage an increase in interest rates will increase your mortgage.

EXAMPLE:

Let's say that your bank tells you that you can borrow 150,000 and your after tax income is 2,800.

Based on our 1/3 rule the monthly repayments which you can afford are 900.

Now if interest rates are 4% your monthly repayment over 25 years will be 790. However should interest rates rise to 6% your monthly repayments would rise to 966.

This stress test should be used to ensure you will continue to afford your monthly repayments with fluctuating interest rates and changing salary.

The above payments were calculated using a mortgage calulator.