The question of how much you can afford is actually a really difficult one. The most obvious, most vanilla approach is to check that your expenses are less than your income, once you are at full mortgage repayments.
In reality, there’s so much more than needs to be considered. After spending a weekend in excel running 4 different scenarios, I realised I needed to calculate not just a flat set of numbers, but rather map the changing expenses over the coming months and years.
Right now we pay rent, once we get the loan we’d be interest only on the purchase of the land (+fees and charges) and 5% to the builder to get things started. The repayments progressively increase as each stage of the build is achieved.
Finally the day will come when you get keys and you can move in, ditch the most intense time of the double payment for rent and mortgage. We need to have a reserve as expenses during this month will certainly outweigh income.
With these changing parameters, the amount repayments end up at is incredibly important when calculating ‘affordability’. After looking at the best case scenario of no options, right up to everything we can imagine, we’ve covered the full range or what you really need to calculate, which is worst case scenario.
Thankfully, it looks like even with some big options that’ll take the house from being good to being spectacular, looks like it’ll still be achievable.
I’ve projected far enough forward that the spreadsheets (Now 15 worksheets that all interlink) now look at dropping back to a single income for a baby. Again, having a reserve will be important and minimising this period is essential. Maternity leave, long service and annual leave should get pretty close to 6 months, where they could start child care, but obviously if difficulties were experienced, we’d need contingency money.
Even once the childcare starts that’s an important thing to consider, basically you’ll never return fully to two incomes when you have another, significant cost in the expenses column. Again, the numbers look achievable.
There may be times where we have to think about money and the expenses we decide to make, but I’m sure everyone with a mortgage faces this, so that doesn’t scare me. Calculating the amount of disposable income after expenses are paid still leaves a decent chunk of change left over. Perfect if we wanted a holiday or update a car.
By far the hardest part in calculating affordability is the parts you don’t know. Not being able to have a formula that calculates Lenders Mortgage Insurance or the setup costs based on the build cost field means educated guesses. Of course future expenses are also difficult, but so is future and additional income.
Everything I’ve calculated is based on my normal 9-5 job, not my second job, not income through the business either, we’ll treat all of this as a bonus.