Now that you know the cost of additional expenses and the amount you can borrow, and of course, you know how much you have in savings, it’s time to calculate your budget for buying. Remember, while you are in the process of buying you will save more money so if it takes you a few months or longer to buy, that’s more savings in your pocket to play with; and hopefully house prices haven’t risen more than that amount in the meantime (sometimes they do, sometimes they don’t).

But wait, there’s one more thing to consider before working out your budget.

Give yourself a buffer

How many times have we heard the saying “save for a rainy day”?

And why?

Because, well, life happens. Unexpected expenses may arise when you buy a property. For example, when we purchased our first property we had to pay for two additional items that we were not expecting. The first was we had to pay the extra ‘value’ of the property (which was $12,000—I’ll come back to this later in Step 3 of this book) and the second was we had to cover the shortfall of a first home buyers incentive that wasn’t ready before settlement (and that was $7,000).

On our second property we had different issues; this time with rising damp in the kitchen. This caused all sorts of respiratory issues for our whole family so we had to deal with this immediately after moving in. We found out the cause and put a stop to it. Friends of ours have had similar situations when buying; broken sewerage pipes, leaking roof, broken pipes behind the shower or in the bathroom, broken fence, and the list goes on. These end up becoming immediate expenses that you have to deal with and pay for.

So, what do you need to do?

You need to give yourself a buffer; an extra amount of money that doesn’t count towards your deposit. Give yourself a buffer of 2-5% or more of the property value.

We gave ourselves more than $20,000 on both properties, just in case. And we needed to use our buffer in both cases.

Working out your buying budget

So let’s work out your buying budget now.

1. I have saved (this is your deposit): $ ________ plus
2. My maximum loan amount is $ ________ minus
3. Your buffer: $__________ minus
4. My expected additional costs are (stamp duty, fees)

$ __________ equals

This gives you your buying budget. Your deposit plus your home loan minus your buffer and minus any additional fees or costs you expect to pay.

Your buying budget $ ______________ (you should now have a budget for buying).

For example, you might have a deposit of $100,000, a maximum loan amount of $250,000, a buffer of $20,000, and additional costs of $15,000:

1. $100,000 +
2. $250,000 –
3. $20,000 –
4. $15,000

$315,000

Try this example out for yourself. And try it for yourself too with all your own amounts.

If you want this to be worked out automatically for you, head to payitinfive.com/gifts. In there you’ll find the free ‘My Buying Budget’ tool. Use that to work it out automatically. Remember to use the password 1234 to access this too.

If you are about to take out a loan, read on as the next step incorporates what we ourselves learned along the way when meeting with lenders. I have prepared a range of questions you can use when you meet with the lender yourself.

You’re welcome!

Before you meet with your lender, it’s important to understand how to make the most of your home loan; coming up in the next chapter.