For most people, buying a new house, be it London or anywhere in the world, is a one-time investment. Using that reason alone, most people tend to splurge and go above their budget in order to fund this ‘one-time’ purchase. This leads to a tighter rein on the spending and quite a big hole in the pocket. However, if you actually make a financial checklist before buying a new house in 2019, you might not have to worry about your funds post this big investment. Here are the three most important financial aspects to look at before you decide to buy a house in London in 2019.
1. Check your purchasing power
Before you decide on buying a new house, decide on your budget. It is very important that your budget is determined by your purchasing power and not by your will! First and foremost, you need to decide on a down payment – the higher the down payment, the lower the mortgage, the quicker your loan gets paid off. While figuring out your budget, do not forget to factor in costs like the cost of paperwork, hiring agents, inspection, property taxes as well as closing costs.
- Usually, 20% is an acceptable amount for the initial down payment – you can decide your budget accordingly.
- The best way to save money for a down payment is to save a certain sum every month for a year or two. That also gives you a good idea about how much you can afford to pay monthly as mortgage repayments without feeling the pinch.
2. Check your credit scores
If you have been maxing out your credit cards or not paying your bills on time, your credit score will be much lower than average. And the lower your credit score, the higher the rate of interest on the loan you take to buy your new house! You credit score is basically telling the bank about your ability to pay back the loan; if your credit score is just too low then there is a high chance you might not even get the loan in the first place. So, you need to start working on improving your credit score a year or at least six months before you plan to make the down payment.
- The best credit score ranges from 960 to 999 – this means loans at great values and various mortgage deals.
- A good credit score ranges from 880 to 960 – this means good interest rates, but slightly fewer options.
- A bad credit score ranges from 0 to 300 – this means no loans or loans at very high interest rates.
3. Check your debt to income ratio
Before giving you a loan, the bank will check all your debts and compare it to your annual income. In this case, your debts include car payments, monthly bills, credit card bills as well as your new mortgage payment. Your debt to income ratio should be less than or at the most equal to 43%. The lower, the better! Anything more than that means big trouble – the banks do not like higher numbers. However, you need to consider all your monthly expenses and not just your debt. Keep in mind expenses like travel, school fees, fixed monthly expenses and even save some money for a rainy day.
- As reported by the property management experts in Aylesbury, your average household expenses should not be more than 28% of your income whereas your debt should not be more than 36% of that very income.
- Let’s assume you make £5000 every month. That means your debt should not be more than £1800 and your fixed expenses should not cross £1400 for the month.
Once you have secured your property, you may want to add value to it by doing renovations or adding a fence, extending it or even totally redeveloping it.