“I’ve been saving towards the deposit on a house for a couple of years. Given the rising real estate prices, I think I should try to buy a home now, but I’m not sure if I can manage the mortgage payments. How can I know if I’m really able to afford to purchase a home?”

The real estate market boom has led to rapidly increasing housing prices and consequently, diminishing hopes of acquiring dream homes. The temptation for some anxious homeowners-in-waiting is to buy quickly before prices get higher, without knowing if their financial position really allows them to afford it.

Last week we looked at the pros and cons of buying a home versus renting a property. If you’ve decided that owning your own home is an important goal, you have to examine your finances to ensure that you’ll be able to meet this major commitment.

The first thing to consider is: what are all the costs involved in buying a home?

1.   Upfront Costs

Down Payment – This will be your biggest initial cost in trying to buy your home. Estimate that you’ll need to have 15%-20% of the property cost in hand before you’re ready to purchase.
Closing costs- These can vary, depending on if you’re buying the property with a mortgage or not:

a)   Attorney’s fees: preparing the sales agreement, fee for transfer, preparation of closing documents,  miscellaneous charges;

b) Government fees: stamp duty, registration fee, stamp duty on mortgage document;

c) Professional fees: valuation report, surveyors ID report;

d) Mortgage processing fees: commitment fees, mortgagee’s attorney fee.

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2.   Relocating Costs

Moving to a new home usually brings many added expenses. You may need to make repairs or enhancements to the house, and you may require new furniture and appliances. Remember to factor in the cost of delivery of your possessions. Calculating your relocating expenses can be tricky, as many times hidden costs crop up that were not planned for. It’s best to add a 5%-10% contingency figure to your relocating budget.

3.   Recurring Costs

Even if you have a lump sum to take care of your deposit, closing costs and relocating expenses, if your income doesn’t allow you to cover the recurring costs of home ownership, you could be heading for financial trouble. Some of the costs to consider are:

Mortgage Payment – These must be paid on time or you may be in danger of losing your investment. You can estimate your mortgage payments at these web addresses: www.vmbs.com/calculator.htm, and www.jnbs.com/jnbs.dti?page=calculator.

Peril insurance premiums – The mortgage company will require you to insure the property for the value of your mortgage. These costs are usually included in your monthly mortgage payments.

Life insurance premiums –  Most mortgage companies require you to insure your life to the value of the mortgage, so that in the event of your death, your indebtedness will be cleared.

Home insurance – This will help to ensure that you’re able to replace your home in the event of a disaster.

Strata fees – If you’re buying into an apartment or townhouse complex, you’ll be required to pay a monthly maintenance charge.

Property tax – Don’t neglect to pay your taxes, as there are extra charges for late payment and it will have implications when you want to resell.

Security, maintenance, emergency repairs – These should also be considered when budgeting for your home.

Now that we have reviewed some of the major costs, how do you know if you can afford to buy? The first step is to obviously accumulate the funds needed for the upfront and relocating costs. The more difficult decision is if you can afford the recurring expenses.

As with any other financial decision, you have to get back to the basics by preparing a realistic budget. Your budget will allow you to see if your income is capable of meeting all of your expenses, or if there is a shortfall.

If there is excess money left after paying all your bills, calculate if this amount would be enough to take care of the additional homeowner expenses. Remember to substitute mortgage payments for rental costs. Start saving this excess in a special ‘house’ account.

If you don’t have money left over after paying your current costs, chances are that you’ll find it difficult to afford the maintenance of a home. Don’t despair, however, as you can try to make adjustments to reduce your spending or to increase your income in order to meet your expected expenses.

In future columns we’ll continue to look at strategies to make your dream of owning your home into a reality.