Work out what you can afford

Many buyers think only about the price of the property. The real cost is higher. After this lesson, you will be able to work out a realistic budget that includes every major cost.

You will also understand the difference between what a lender might offer you and what you can comfortably pay each month.

The three parts of your budget

Your budget has three parts. The first is the deposit, also called a down payment. This is the part of the price you pay from your own money.

The second part is the buying costs. These are the one-off costs of the purchase itself. The third part is the running costs, which you pay every month or year after you move in.

Many buyers plan well for the deposit but forget the other two parts. This can leave them short of money at the worst moment.

Buying costs to plan for

Buying costs differ greatly from place to place, so treat this as a checklist, not a price list. Common buying costs include:

• Legal fees for a lawyer, notary or conveyancer, the professional who handles the legal transfer of the property.
• Transfer tax, also called stamp duty or property transfer tax, which some governments charge when property changes hands.
• Registration fees to record you as the new owner with the land or property registry.
• Survey or inspection fees, paid to a qualified surveyor or engineer who checks the building's condition.
• Loan fees, such as arrangement or valuation fees, if you borrow money.
• Moving costs, plus money for basic furniture or urgent repairs.

Ask a local lawyer or notary, and a lender, which of these apply to you and roughly how much they will be. The tax office can tell you about any taxes on buying.

Running costs after you move in

Owning a property brings regular costs. These may include loan repayments, property taxes or local rates, insurance, utilities, and service charges if you share a building with others.

Repairs and upkeep are easy to forget. Roofs, pipes and electrics all wear out over time. A good habit is to set aside a little money every month for repairs, so a large bill does not catch you by surprise.

A worked example

Here is a simple example to show how the numbers fit together. These figures are only an example and do not reflect prices or rules anywhere.

If a home costs 100,000, your deposit is 10,000 and the buying costs are 6,000, you need 16,000 in cash before you move in. You would also borrow 90,000 from a lender.

On top of that, it is wise to keep an emergency fund. This is savings you do not touch except in a real emergency, such as losing your job or a sudden repair.

What you can comfortably pay

A lender may agree to lend you more than you can comfortably repay. Lenders look at your income and debts, but they do not know your whole life. Only you know your plans, your family needs and your other goals.

List your monthly income after tax. Then list every regular cost, including food, transport, childcare and savings. The money left over shows what you can safely spend on housing each month.

Test your budget against change. Ask what would happen if interest rates, the cost of borrowing, went up, or if your income fell for a few months. If the budget only works when everything goes well, it is too tight.

An independent financial adviser can help you check your plan. You can also find more guides in our knowledge and advice section.

Common mistakes

• Forgetting buying costs. Avoid this by asking a lawyer and a lender to estimate every cost before you make an offer.
• Spending all your savings on the deposit. Avoid this by keeping an emergency fund separate from your deposit.
• Borrowing the most a lender will offer. Avoid this by basing your budget on what you can comfortably repay each month.

Key points

• Your budget must cover the deposit, the buying costs and the running costs.
• Buying costs differ by country, so ask a local lawyer, a lender and the tax office.
• Choose a monthly payment you could still afford if rates rise or your income falls.