How To Tell If You Can Afford That House
When you are first buying a home, whether you were renting before or living in with parents, the costs of living can seem very nebulous. It's hard to see what you would need to pay on a monthly basis, and what you need to keep money in stock for.
I will give you a run-down of the monthly costs, and how to compare them to your current costs. Then, I will list an overview of the things you will need to keep money in stock for. Finally, there are some things to consider when buying a somewhat older home which I will add as well.
Recurring Housing Costs
When you get a mortgage that comes with a number of basic components to pay for; amortization, which means paying off the loan; interest, which means paying the bank for the privilege of having a loan; and often some administration charges. When you buy a home, you will usually know these already. These are charged monthly.
But what is a good thing to do is to see the increased costs if you need to pay an additional 5% interest. If the interest rate rises and you can't afford your home, you're in trouble. Or if you lost your job and your new job doesn't pay as much as your old one did.
Also check options for either paying off additional debt (and the associated penalty) or having a year's respite on paying mortgage. This way you have some tools to pay off more when you have a good year, or keep some money in reserve if you have a bad year. Many banks will have options to help you, and really appreciate a customer who thinks ahead.
Second come capital taxes on owning a home. These will vary depending on your location, and are paid annually. When you buy a home, you don't have to pay the house tax the first year, usually. This is because most countries check once per year who owns it and charges the tax, so unless you bought the house right before the check date you may skip it a year.
Insurances, utilities, internet and waste are the next large cost item on the list. Whereas the previous cost constitutes more or less a "right to live here", these are expenditures based on you using the house. Especially insurance can be very important because unlike in a rental you are responsible for everything that goes on with your home!
If your house is connected to the grid, there may be a number of charges (paid monthly or annually) for that. Your type of house can also mean you are an automatic or mandatory member of an organization. This can happen if you are in an area with hunting rights, if your house is part of a cooperation, or if the house is part of (for example) a holiday home area. Like with trash collection and snow shoveling, these could be part of municipal charges or taxes, or you could be expected to handle those yourself.
The first major cost category are those related to the house itself. Divide annual costs by 12 and add them to your monthly charges to see an estimate of monthly "housing costs"
Cost of Living
Now that you know the chunk of budget taking up with housing costs, let's look at the cost of living. You may notice that I added internet to housing and not living costs, and that is because it's a recurring fixed cost but also because internet is so vital in our modern lives that its importance warrants that.
Costs of living include all the costs to live your life on a monthly basis, and I like to divide these into two categories: critical and elective.
Critical expenses are those you need to make in a month; food for yourself and your pets, for example, as well as transportation. Whether you use public transport or a car to get to work, it's a critical component to your daily life.
Elective expenses are those you can skip on, or can downgrade if you so choose. Going out is a good example - it's a good thing to go out to have fun and recharge but you have a wide range of options so you can choose to stick to going for coffee this month rather than a lunch. Clothing, subscription services, phone subs and so on are things that are in this category. Note that many subscriptions cannot be switched easily, so take this into account and do a yearly review of your subs.
Food is a special expense, in that it is critical to have it, but you could indeed choose to downgrade it in cost. I would advise against this, because it's not only the cornerstone of a healthy life, but also lays the foundation for your middle and old ages. You may not notice much if you choose to eat lower quality food, but you may develop more problems when you grow older because of it. My advice would always be to prioritize good quality food and your home together, and if you need to conserve money do it on anything else.
If you find that you could not afford the home and reasonable food, that is a good indication you're not going to be able to afford the home in the long run and that you may run into financial issues.
Review Your Finances
Every year, do a review of how you spent your money. Maybe you can stop a subscription you didn't use and save some money. If you never really used your phone sub to its capacity, maybe downgrade it. When you check your insurances, other companies might be able to get you a better deal or a sign-on bonus that is better than the "loyal customer bonus" (if any) of your current insurance.
This is just a good idea in general. When you do this, also check your mortgage and see how much you've paid off in debt, and see if you can negotiate a better interest based on this. Most often this comes into play at the 10/20 year marks of the mortgage, but banks won't always alert you that you've an opportunity to renegotiate this, and then you might keep paying interest on a piece of the debt you already paid.
Critical expenses should not be skimped on. Elective expenses can easily be downgraded or skipped for a month to open up some disposable income.
You will want to save up money on a monthly basis. It's not easy to give on advice on how much that is, because it's highly personal and subjective based on where you live. When you rent, I always advise having a month's pay in savings. When you bought a home, I'd advise a year's pay, but that's a sweeping statement.
Another way is to consider the most expensive item that can fail in your house, and how much it would cost to fix it. Good examples are a leaky or damaged roof, or cracks in the basement or foundation. Those are expensive fixes that ordinarily people might need to get a short-term loan for, so having enough money in supply for this is a good idea. To get an idea on how expensive those fixes would be, you could check various home-owner forums, or simply ask an offer from a few companies on replacing the roof.
These savings also can cover temporary unemployment. Having a year's wage in savings set aside also means you can live in your house for a year before you'd get in financial trouble, and you can also cover a period in which you might earn less money than before. This would mean you couldn't fix big things for now, but you won't lose the house!
If you get an unexpected windfall, like a bonus or tax return, try and put as much as you can in the savings or the house. Feel free to treat yourself and your family of course, it pays to feel rewarded! When you put a little extra in the savings it will allow you to build up a safety net. You can also add to the house and increase it's value. Good examples are a garage to replace a carport, or upgrading the flooring. Those are things that add value later on if you decide to sell the house.
Savings are a safety net. Having a year's savings set aside means you can keep living in the house without worry if you'd lose your job, or make a major repair like the roof or the foundation.
On Buying An Older Home
If your house is older this means that you as the buyer might need to be ready for some renovations. Roofs often last 20-25 years, outside cladding 20, heating and water supply 20. On the upside, those renovations also increase the home's value and immediately improve the energy expenditure of the home.
When buying an older home, you need to be aware that older electricity installations might not be earthed, have low amps or have no circuit breaker. This is dangerous and often no longer allowed. Be prepared that this might mean opening up walls to rewire things - and use that as an opportunity to improve the insulation while you're at it!
Water might come from municipal sources, same as waste removal (toilets), but sometimes a property might have a well and a septic tank, especially in rural areas. Those will also need an upgrade after 20-25 years, and you may want to add filters and filtration chambers to make sure the water is safe when it comes in, and goes out, of your property.
Heating is a very diverse topic, and older homes might range from fireplaces, floor heating and radiators (oil or water filled) to mountain heating (geothermal) and district heating (hot water pumped through the municipality). Older systems often are more expensive and work-intensive, but it can also be expensive to shift to another. Think about how much money you'd save in, say, 10 years and if you break even then, it'd be a good idea. You then easily have 10 more years of saving going for yourself.
Older homes can have a lot of issues with poor maintenance, moisture and leaks, mold and being difficult to remodel because they've worked and cracked and lost all their 90 degree angles. This may be less of an issue in houses made of stone, but wooden homes can move and warp over time, especially if they are not treated well. These can be treated very well, but it requires patience and a willingness to live in a renovation zone for a year or so. Take stock if you have the money, skill and patience to do this before you buy the house.
Finally, a home like that will have no fiber drawn to it, meaning you have to arrange and pay for this. Sometimes companies can include you in an existing plan, which is always cheaper, else prepare to pay a lot of money to bury a fiber line to your property, then draw it into your home and connect it all. If this is too expensive, or not possible at all, perhaps look into options to use mobile broadband or satellite internet, even if those are not as ideal as a fiber drawn to the home.
Older homes means things need to be replaced that are at the end of their lives, and that you need to upgrade older standards of living.
Raze and Rebuild
There is a less common way to be able to afford a home, especially in the countryside, and that is to start from an empty plot. If you're interested in having a home with a large garden, or perhaps are interested in smallsteading or forest gardening, this might be what you're looking for.
This method does require either patience and some additional funds, or being handy at renovations.
In essence, instead of looking for a complete house, you are looking to purchase an empty tract of land, ideally with a small run-down house on it that is in dire need of renovation. Because of its state (empty or run-down), the price is likely to be substantially lower, allowing you a much lower mortgage.
If you can manage, you could negotiate a mortgage that is small enough that you will be able to maintain your current rental, and while you are there, make payments for your plot. In the years that follow, you make improvements to the plot and the house each year. For example, you might improve the water or waste connections, place down fiber or construct a large shed to house your equipment.
The improvements over time will allow the value of the property to increase; once you feel it has improved sufficiently, you can have the property's value re-evaluated and negotiate with the bank on a builder's loan. This is the loan you'd need to raze the old building down to the foundation and then rebuild a new, modern home.
Make sure that at this time you have good finances, architectural drawings, and a cost-benefit analysis. Show the bank how much the property value would increase as opposed to the needed loan, and that you are capable of repaying that. Also ask them if it's possible to repackage the mortgage from the builder's loan together with the older mortgage from the plot itself.
As usual, ask multiple banks about the opportunities for refinancing.
This way of doing things is much slower than buying a home, or buying to renovate. Expect to spend five years recovering from the plot purchase and making improvements to it. After that, your finances at the time will tell you if you can continue on with the project.
Worst comes to worst, you can make critical repairs and renovations and then sell on the house and plot at an increased price, and use the money for purchasing a full home.
It might be scary to tally all the costs and find out you may need to settle on a cheaper house, or save a bit longer to afford the type of house you really want. But it's worth it to prevent yourself from getting in financial troubles and the resulting stress.