What house can you afford?

Housing affordability is an important consideration for anyone looking to buy a home. It refers to the ability of a person (or family) to afford the costs of owning and maintaining a home, including the monthly mortgage payment, property taxes, insurance, and other expenses.

There are several factors that can impact your housing affordability, including:

The household income

The amount of money you make can affect your ability to afford a home. 

One general rule mentions that it's recommended that your monthly mortgage payment, including taxes and insurance, be no more than 28% of your gross monthly income. This is known as the 28/36 rule, which is used by many lenders.

Another rule of thumb used by financial professionals consists of having all housing costs below 35% of your net household revenue. That would include mortgage, taxes, insurances, utilities and maintenance. This one tends to be closer to reality since it is calculated on your net salary, considering that you have no other debt.

Interest rates

The interest rate on your mortgage loan can significantly impact your monthly payment. Higher interest rates mean higher monthly payments, which can make it more difficult to afford a home. Some countries also calculate your affordability based on a higher interest rate, in the situation where the interest would rise.

This means that even if the interest rate is around 3%, they would calculate if you could also afford it at a higher rate, like 5%. That’s just an example and countries all have different approaches.

Home prices

The cost of a home is a major factor in determining its affordability. In some areas, the cost of housing may be significantly higher than in others, making it more difficult for some people to afford a home.

You might need to look with a trustable real estate agent to point out the best location for your needs. A good rule of thumb is going for a house lower than 3 times your household gross revenue. Of course, depending on the economic cycle and house location, it might sometimes be impossible to respect.

Down payment

The amount of money you have available for a down payment can also impact your ability to afford a home. A larger down payment can help lower your monthly mortgage payments and may even help you qualify for a better interest rate.

In some countries, the down payment is dependent on the house value. Most of the time the minimum payment is 5%, but in some scenarios you might be required to put 10% of cashdown. 

Conclusion

There are several options available for people who are struggling to afford a home, including government-backed mortgage programs and down payment assistance programs. It's important to carefully consider your financial situation and explore all your options before making a decision.

Calculating the amount you can afford is a complex situation and it's important to carefully consider all your options before making a decision. By understanding the factors that impact housing affordability and exploring all your options, you can make an informed decision with your mortgage advisor that aligns with your financial goals.