Do you like baked beans? Unless you want to be eating student grub for the next few years it’s a good idea to figure out how much house you can really afford.

Don’t be fooled by what the banks tell you that you can borrow. It’s not the same question. Can you really afford the repayments? Really? The banks’ calculators don’t always take into account all the other things you have to pay for when you’re a home owner.

What they do is crunch a minimum monthly surplus that the average person has after living costs are deducted. Who’s to say your spending patterns are “average”. What’s more, this “uncommitted monthly income” (UMI) calculation varies from bank to bank.

Every home buyer needs to do his or her own number crunching. The banks’ computers can’t predict that you’ll be dropping to one income when babies come along or, on the other side of the coin, that you’ll have an extra $1,000 a month earnings from Airbnb for a spare a room or sleepout you plan to let.

Here are some of the ‘what can I afford’ tricks and traps you’ll need to consider before signing on the dotted line of those mortgage documents:

Trick: Write yourself a monthly housing budget and compare it against your current spending. It’s often said that you shouldn’t be paying more than 40 per cent of your gross household income in mortgage payments. Make sure your budget includes repairs and maintenance, rates, water, utilities and insurances including house, contents, life, income/mortgage protection. Don’t forget to build in a buffer to cover for unexpected expenses such as insurance excesses.

Trap: Small deposits mean higher fortnightly or monthly mortgage payments. Bigger really is better when it comes to deposits. You’ll also find you become more attractive to lenders the larger your deposit gets.

Trick: Try living on your house budget for a few months to see if you can really afford to take the plunge. If you’re struggling every single week to make ends meet you might want to juggle your budget. Can you buy a more modest house?

Trap: Apartments are often way cheaper than other types of properties to buy. But most banks are nervous of lending on apartments and require bigger deposit than they do for standalone houses or home units. What’s more you’ll need to pay body corporate fees and sometimes leasehold charges on an apartment. Having said that, these fees reduce the amount you pay in maintenance because you only need to pay for work on the inside of your home not the outside.

Trick: Boost your income. Moonlight, sell stuff, start a business, rent your spare rooms to students, boarders or flatmates, get a promotion, babysit, sign the children up as actors or models, or simply spend less. Make a game of choosing not to buy things you’ve convinced yourself you “need”. That frees up more money for mortgage payments.

Trap: Some people fail the banks’ UMIs, but can in reality afford the mortgage. They might be the type of people who live on the smell of an oily rag and can prove it with their bank statements. It’s a really good idea in this situation to use a mortgage broker. Brokers (aka advisers) know how to overcome such road blocks.

Trick: Interest rates can rise and fall. It’s best to do your numbers on rates that are a fair chunk higher than currently. Someone who is really cautious might want to add two percent to the current rate. That way you’ll be sure you can stomach an interest rate rise, which will come eventually. Twenty five years is a long time and rates won’t always be at five per cent or below.

Finally, happy house hunting.

The post Trick or trap: How much house can you really afford? appeared first on Credit Simple NZ.

Mortgages in Auckland are not small. The average one is $393,000 and a quarter of them are at least $500,000. When you owe that much money you want to know things are going to be okay: that your property values will stay up, that your interest rates will stay down.

But the truth we come to know quickly in the credit rating business is that unhappy surprises have a habit of turning up. These post-GFC times have given us some very low interest rates. It’s possible they’ll stay low for some time. But it’s one thing to be a possibility, another to be certainty. Financial prudence says you need to ask: what if interest rates start making their way up?

Let’s say you’re already paying nearly half your income on your mortgage at the current rates – and we know that many people are – what are your options then?

Bill English, in Washington last month, raised the possibility that interest rates could rise. He talked about central banks around the world taking a fresh look at interest rates, given that low rates don’t seem to be having the stimulating effect on the economy they earlier had been. He says they see the possibility of interest rates making their way back up.

But when? He couldn’t say, and in fact no-one can for certain, and that’s what can make a career in the financial markets so fascinating and lucrative. A single event can create a multitude of uncertainties. The election of a new president could take rates in one direction, these earthquakes might take them in another.

But out in the real world of mortgage payments, it comes down to something simpler: “If, or when, it comes, can we afford a rate rise?”

If your rate lifts by two percent, the monthly cost of that won’t be trivial. On a half-million dollar mortgage, the extra monthly interest cost alone will be around $800. On a million dollar mortgage, it’ll be around $1,600 a month. Two per cent might sound like a lot but bear in mind the 10-year average for interest rates sits at 6.7 per cent.

No one wants to be a merchant of doom. But in our business, we know that the more clear-eyed you are about your financial position, the more stable your position will be when bad news blows in.

If this talk about rising rates worries you, what options do you have?

In our business, we don’t just offer people a credit rating, we also try to help them improve their financial position. What we often find is that people aren’t alway as open to changing their overall circumstances as it might suit them to be.

We may tell some people, for example, that they may imagine that their job prospects are best in Auckland and they can’t realistically consider any alternative, but that actually their track to better financial health might take you along roads they hadn’t considered. Maybe that road might take them through Gisborne or Invercargill.

But if that’s really a bridge too far, we have a couple of other suggestions: Maybe avoid adding to the mortgage to fund lifestyle/house extensions/spending money right now. If a rise in rates might mean that some months or years from now you’ll struggle to pay your mortgage, leading to a default and a negative impact on your ability to borrow later in life, throttle back, for now.

At the very least we’ll tell them to be looking for a better rate. You’d be surprised how keen the other banks may be to take your call right now.

The post Will the sun always shine on your mortgage? appeared first on Credit Simple NZ.