Wanting to buy a house in a tough market
December 5, 2015 1:27 AM Subscribe
Since I recently moved back into the parental home and started a full time job that I love, I'm finally in a position to save some money. According to the news, the housing market is starting to cool, so I'm considering saving up for a house. But is there actually any way that I would be able to manage this in my situation? Details inside.
As many relevant details that I can think of:
- I'd like to buy a freestanding home with 2 - 3 bedrooms, so that the prospects for renting out some bedrooms or the whole house are better.
- A rough price range would be about $300,000 - $350,000
- My goal is to save $30,000 - $35,000 by the end of next year. I'm making regular deposits into a savings account with 2.8% interest which is calculated daily.
- My current salary is in the $40,000 - $50,000 range (depends on bonuses) and this won't change much for at least two years. Home loan interest rates run around 5.8%. There are options (insurance and/or premiums) for borrowers with a deposit of less than 20% of the property price.
- I'm pretty flexible with my timeline for when I want to buy. I'm not sure whether I'd be better off saving for a few years and buying a place. Or buying sooner and renting the property out while continuing to live where I am. I would rent out the other bedroom/s once I do move into the property, at least for a few years.
- I'm not too fussed about having a big yard, so I would be willing to subdivide if the property is big enough.
Based on these criteria, I'd really appreciate any kind of advice that people can contribute. Even if it is just "Um, don't buy a house."
As many relevant details that I can think of:
- I'd like to buy a freestanding home with 2 - 3 bedrooms, so that the prospects for renting out some bedrooms or the whole house are better.
- A rough price range would be about $300,000 - $350,000
- My goal is to save $30,000 - $35,000 by the end of next year. I'm making regular deposits into a savings account with 2.8% interest which is calculated daily.
- My current salary is in the $40,000 - $50,000 range (depends on bonuses) and this won't change much for at least two years. Home loan interest rates run around 5.8%. There are options (insurance and/or premiums) for borrowers with a deposit of less than 20% of the property price.
- I'm pretty flexible with my timeline for when I want to buy. I'm not sure whether I'd be better off saving for a few years and buying a place. Or buying sooner and renting the property out while continuing to live where I am. I would rent out the other bedroom/s once I do move into the property, at least for a few years.
- I'm not too fussed about having a big yard, so I would be willing to subdivide if the property is big enough.
Based on these criteria, I'd really appreciate any kind of advice that people can contribute. Even if it is just "Um, don't buy a house."
(1) how can you save $30,000 on a wage of $40,000? are you really spending just $800 a month? (maybe your parents would appreciate a contribution to housekeeping).
(2) 6% of a $300,000 mortgage is $18,000. on a wage of $40,000 that leaves $22,000 to live on. can you live on $1,800 a month (when you're in your own home, not your parents')?
i guess my suggestion would be to spend a year tracking how much money you need (including, in some way, trying to quantify how much your parents are saving you), and seeing if you can really meet your savings targets.
posted by andrewcooke at 2:20 AM on December 5, 2015
(2) 6% of a $300,000 mortgage is $18,000. on a wage of $40,000 that leaves $22,000 to live on. can you live on $1,800 a month (when you're in your own home, not your parents')?
i guess my suggestion would be to spend a year tracking how much money you need (including, in some way, trying to quantify how much your parents are saving you), and seeing if you can really meet your savings targets.
posted by andrewcooke at 2:20 AM on December 5, 2015
Response by poster: Thanks for the comments so far. It has made me realise I need to clarify a few things:
- I already have some savings, my work offers monthly bonuses, and I am guaranteed pay rises every six months, hence aiming for $30,000 by next year. I plan on saving until I have at least a 20% deposit together before I even think about buying. But I have heard stories about people buying houses when they have a very small deposit and somehow making it work.
- There are agreements in place with my parent about my contribution towards our living arrangement.
I realise that buying a house isn't something that is going to happen by the end of next year. I'm really looking for advice about how I could work towards it, and how I could do it in the smartest way once I do eventually buy.
NB: Obviously the biggest thing would be increasing my salary, and that is something that I'll be actively working towards. I'll probably have to leave my current company to get the kind of salary that I want, but that's not something I can feasibly do until I've been there for at least a couple of years.
posted by kinddieserzeit at 2:47 AM on December 5, 2015
- I already have some savings, my work offers monthly bonuses, and I am guaranteed pay rises every six months, hence aiming for $30,000 by next year. I plan on saving until I have at least a 20% deposit together before I even think about buying. But I have heard stories about people buying houses when they have a very small deposit and somehow making it work.
- There are agreements in place with my parent about my contribution towards our living arrangement.
I realise that buying a house isn't something that is going to happen by the end of next year. I'm really looking for advice about how I could work towards it, and how I could do it in the smartest way once I do eventually buy.
NB: Obviously the biggest thing would be increasing my salary, and that is something that I'll be actively working towards. I'll probably have to leave my current company to get the kind of salary that I want, but that's not something I can feasibly do until I've been there for at least a couple of years.
posted by kinddieserzeit at 2:47 AM on December 5, 2015
Just make sure you remember closing costs when you're saving. Depending on the price of the house they can be up to $10,000 or more. (You pay these when you pay the down payment, they're a separate additional cost.) Also, keep in mind you'll need an emergency fund in addition to your down payment and closing costs. And of course money set aside for moving and any repairs or other things you need to buy (ie. curtain rods, the first time we moved into a house we hadn't realized it might not come with curtains/blinds...).
So make sure your final target number accounts for all of these things instead of just the 20% down payment.
Also, I highly recommend picking up a book (or getting one from your library!) on buying a house. Make sure it's an unbiased one (there are a lot of scam get-rick-quick books out there) and it covers budgeting, financing, and all the ins and outs of mortgage paperwork. It'll give you a much better sense of what you've got to plan for. Also, make sure it was published well after 2008 since things have changed a lot. I found this one to be helpful and informative.
posted by scififan at 3:35 AM on December 5, 2015 [1 favorite]
So make sure your final target number accounts for all of these things instead of just the 20% down payment.
Also, I highly recommend picking up a book (or getting one from your library!) on buying a house. Make sure it's an unbiased one (there are a lot of scam get-rick-quick books out there) and it covers budgeting, financing, and all the ins and outs of mortgage paperwork. It'll give you a much better sense of what you've got to plan for. Also, make sure it was published well after 2008 since things have changed a lot. I found this one to be helpful and informative.
posted by scififan at 3:35 AM on December 5, 2015 [1 favorite]
I think you'd find the forums and the blog at Mr. Money Mustache helpful. They're focused on early retirement, which includes a lot of information about saving and also about real estate. There are a LOT of ways in which buying a house can be made easier or harder -- reading more about that is an excellent idea.
posted by pie ninja at 4:30 AM on December 5, 2015 [1 favorite]
posted by pie ninja at 4:30 AM on December 5, 2015 [1 favorite]
Lenders will look at your income and expenses and they are the ones who will set the ceiling for how much house you qualify for.
posted by St. Alia of the Bunnies at 4:49 AM on December 5, 2015
posted by St. Alia of the Bunnies at 4:49 AM on December 5, 2015
This is too much house for your income, unless you're putting 100,000k down. I would aim to keep your mortgage below 200,000k. It's a good idea to have money to pay six months of expenses put away before you buy your home. Including your mortgage in those expenses and 1% of the purchase price per month for home repairs. The housing market can be fickle and you're better off spreading around your savings in stocks and bonds (think Vanguard) and a more affordable dwelling.
posted by Kalmya at 5:03 AM on December 5, 2015 [6 favorites]
posted by Kalmya at 5:03 AM on December 5, 2015 [6 favorites]
The downpayment and closing costs are not going to be your big barrier if you are saving like you say you are, but the monthly payments might be. A $325,000 house at 5.8% interest is going to be around $2000 per month, assuming taxes and insurance are close to the average values used on most mortgage calculators. (You will want to use real numbers for those, as well as for the interest rate, appropriate to your specific situation, rather than averages, obviously, but this gets at least an approximate value to work with. That interest rate is a lot higher than I would pay here, for example, so it is important that your budgeting reflect the most accurate numbers possible for you and your location.)
And then you need to consider the costs of maintenance, repairs, and upgrades. I don't know how big a $325k house is where you live, but take a look at the cost to reroof a house of that size, or to replace the furnace, for example. Even if you DIY almost everything, there are still costs (tools, supplies, and your time), along with the time and expense of dealing with the local permitting office. At your current income, that is a larger house commitment than I would be comfortable with by a significant amount.
My experience is that houses are more expensive than people often want to admit -- people almost always present the absolute best financial case in very simplistic numbers, while the real math is a lot less rosy. When someone says "I bought the house for $100k and sold it for $150k," they aren't mentioning the loan origination fees, the repairs, or the cost of redoing the kitchen and buying new appliances.
You may have family support that you aren't mentioning, and this will of course change the math dramatically. If you are fortunate enough to be getting help with the downpayment and/or monthly costs, then the house might make a lot more sense. I don't know how lenders use that kind of assistance in their calculations, but it is common enough that it won't be the first time they are seeing it.
posted by Dip Flash at 5:10 AM on December 5, 2015 [13 favorites]
And then you need to consider the costs of maintenance, repairs, and upgrades. I don't know how big a $325k house is where you live, but take a look at the cost to reroof a house of that size, or to replace the furnace, for example. Even if you DIY almost everything, there are still costs (tools, supplies, and your time), along with the time and expense of dealing with the local permitting office. At your current income, that is a larger house commitment than I would be comfortable with by a significant amount.
My experience is that houses are more expensive than people often want to admit -- people almost always present the absolute best financial case in very simplistic numbers, while the real math is a lot less rosy. When someone says "I bought the house for $100k and sold it for $150k," they aren't mentioning the loan origination fees, the repairs, or the cost of redoing the kitchen and buying new appliances.
You may have family support that you aren't mentioning, and this will of course change the math dramatically. If you are fortunate enough to be getting help with the downpayment and/or monthly costs, then the house might make a lot more sense. I don't know how lenders use that kind of assistance in their calculations, but it is common enough that it won't be the first time they are seeing it.
posted by Dip Flash at 5:10 AM on December 5, 2015 [13 favorites]
The benefits to owning your own house relative to renting (in my view) decrease dramatically if you are renting out surplus bedrooms. The benefits, financial or otherwise, from renting out an entire house that you own, are minimal. Moreover, while it's possible renting out 1-2 bedrooms would give you enough income to nominally afford the house, this is irrelevant to getting approved for a mortgage. You might get someone to give you a $200-250K mortgage at your income, but not more.
Saving is never a bad goal, but it might be a few years before you can afford a house under the parameters you list.
posted by deadweightloss at 6:57 AM on December 5, 2015 [1 favorite]
Saving is never a bad goal, but it might be a few years before you can afford a house under the parameters you list.
posted by deadweightloss at 6:57 AM on December 5, 2015 [1 favorite]
You need to talk to a mortgage lender in Australia to get an idea of the income to mortgage ratio in your lender market. By US and EU standards, you can't pay for the house you want to mortgage but that may not be the case in your market.
posted by DarlingBri at 7:19 AM on December 5, 2015
posted by DarlingBri at 7:19 AM on December 5, 2015
I think the plan is a good one in most ways, but I think the 300-350k target range is unrealistic. Like kitten magic, my house was in your range, but I make more than twice what you do. Sometimes I wonder if I would have been better off with less. I think even if it looks possible on paper, you'd be getting yourself into a serious money stress situation at that price point. I guess everyone has a different tolerance for financial risk - I'm pretty risk averse and that would be way above mine.
posted by ctmf at 10:46 AM on December 5, 2015 [1 favorite]
posted by ctmf at 10:46 AM on December 5, 2015 [1 favorite]
Don't forget to think about the costs of your leisure time. Do you like to travel, eat out, see live shows, have a hobby? Consider if you have to curtail your lifestyle to pay for a house that you can only just afford and whether that's a worthwhile sacrifice for you.
posted by praiseb at 12:07 PM on December 5, 2015 [1 favorite]
posted by praiseb at 12:07 PM on December 5, 2015 [1 favorite]
Response by poster: I really wish I could cut down on the price. But it is a tough market here. Two bedroom houses in less expensive areas where I'd still be comfortable living aren't marketed below $290,000. But I doubt they sell that low. I will monitor the market over the next couple of years and see what happens.
Some fantastic advice above that I'll need to factor into my calculations. Especially the stuff about bigger repairs.
In the end, buying a house here might never be feasible. But I'll keep savings so that I have a bigger nest egg put away.
posted by kinddieserzeit at 2:22 PM on December 5, 2015 [1 favorite]
Some fantastic advice above that I'll need to factor into my calculations. Especially the stuff about bigger repairs.
In the end, buying a house here might never be feasible. But I'll keep savings so that I have a bigger nest egg put away.
posted by kinddieserzeit at 2:22 PM on December 5, 2015 [1 favorite]
You might be able to get more market-specific advice in /r/AusFinance. It's not that active but home buying a big topic there.
posted by DarlingBri at 3:23 PM on December 5, 2015
posted by DarlingBri at 3:23 PM on December 5, 2015
The rule of thumb I've always heard is to buy a home worth 2x to 3x your annual salary in order to be able to afford your mortgage. Unless you have a giant windfall inheritance you're not telling us about or a spouse with a high income, it seems like a bad idea to buy right now at that price range.
posted by deathpanels at 4:52 PM on December 5, 2015
posted by deathpanels at 4:52 PM on December 5, 2015
Then again the interest rates are so low right now. That makes all the difference.
posted by Oyéah at 6:50 PM on December 5, 2015
posted by Oyéah at 6:50 PM on December 5, 2015
I hear you on the prices. It's just ridiculous here and I don't know anyone making less than high 6 figures who would be able to keep their purchase in the 2-3 times annual income range. The prices you are looking at are already much cheaper than in my area but you're looking st free standing houses, have you considered a unit or a town house to get you on the property ladder?
posted by kitten magic at 7:51 PM on December 5, 2015
posted by kitten magic at 7:51 PM on December 5, 2015
Most people recommend a mortgage 2-3x your annual salary. 4x is pushing it. 5x is really risky. On that, you won't really be able to save money. What will you do if you need to replace your roof or your sewer or just your hot water heater? What will you do if you lose your job? So you need an emergency fund, and the higher your monthly spending, the more emergency fund.
Some of those repairs can be cheaper if you DIY, but do you have the time and interest? People you know to advise you? Friends with tools you can borrow? Home ownership is a lifestyle. Take into consideration the good parts and the bad.
If you are single and buying a three bedroom house, can you rent out a room or two? That might bring in some rental income, and bring down your rental costs. And you can still own a house. (But granted you'd have roommates, and some people are just not suited to be landlords.)
FWIW, I bought a $340k house on a $100k salary with $20k down. Interest rate of 4.25%. It wasn't awful but it didn't feel super easily affordable either. I think on half that salary, I would be stressed out of my mind.
posted by ethidda at 12:55 AM on December 6, 2015
Some of those repairs can be cheaper if you DIY, but do you have the time and interest? People you know to advise you? Friends with tools you can borrow? Home ownership is a lifestyle. Take into consideration the good parts and the bad.
If you are single and buying a three bedroom house, can you rent out a room or two? That might bring in some rental income, and bring down your rental costs. And you can still own a house. (But granted you'd have roommates, and some people are just not suited to be landlords.)
FWIW, I bought a $340k house on a $100k salary with $20k down. Interest rate of 4.25%. It wasn't awful but it didn't feel super easily affordable either. I think on half that salary, I would be stressed out of my mind.
posted by ethidda at 12:55 AM on December 6, 2015
Don't buy a house!
The economy has changed and houses are no longer investments, cheaper than living in an apartment or even that much fun.
You are young and you don't know how your life will change over time. A house will be an anchor. Great if you want to stay put and never change, but deadly if you want to be free.
Read this by James Alchuter and see if it doesn't make sense.
posted by Ruthless Bunny at 5:36 AM on December 6, 2015 [1 favorite]
The economy has changed and houses are no longer investments, cheaper than living in an apartment or even that much fun.
You are young and you don't know how your life will change over time. A house will be an anchor. Great if you want to stay put and never change, but deadly if you want to be free.
Read this by James Alchuter and see if it doesn't make sense.
posted by Ruthless Bunny at 5:36 AM on December 6, 2015 [1 favorite]
The economy has changed and houses are no longer investments, cheaper than living in an apartment or even that much fun.
Make sure you are seeking advice relative to the area you would be buying in. I understand that what I have quoted above is the case in the US but Australia was not hit by the recession (or as we call it, the Global Financial Crisis). Prices in my city have risen so much and the rental market is so tight (and rents rise constantly) that home/unit purchases have been a great investment. But they do tie you down - a free standing house especially so.
posted by kitten magic at 2:21 PM on December 6, 2015
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Also, my house cost the top end of your range, I make twice what you do and I had about 10k more saved than you project and I would be very, very concerned to have the expenses I have on on your pay.
posted by kitten magic at 2:10 AM on December 5, 2015 [7 favorites]