5 STEPS TO WORK OUT HOW MUCH MONEY YOU SHOULD SPEND ON A NEW HOME
You might be researching the option of a building a new home, and are finding that the spectrum of how much money you should spend on a new home is huge – in fact, it almost doesn’t make sense as to why there is such a broad range, and you’re at the point of really dwelling on the question of how much money should you spend on a new home.
And this is a very thought-provoking question for 2 reasons – 1. It’s subjective, there’s no fixed answer that’s right or wrong, and 2. Who’s qualified to provide an answer the question?! You might think that a builder trying to provide insights on how much money to spend on a new home is a bit biased – perhaps you think it’s like trying to ask a child for advice on whether to buy lollies or brussel sprouts.
But someone has to address the question, and so without ado – and hopefully without bias – here goes!
Try thinking of this question as a pentagon shape – there’s 5 sides to look at. And they range from the short-term to the long-term. So the first one is pretty obvious – how much can you afford to spend? 2nd is what can you borrow (assuming you’re lending from the bank)? 3rd is what your needs are. 4th is whether you’re overcapitalising, and finally, 5th, what are your personal tastes, styles and wants?
As we’ve already mentioned, in principle there’s no right or wrong answers. But in practise, there are very different go and no-go zones for different people. We’ll explain each step in a bit more detail.
Don’t spend more than you can afford
So Step 1 is pretty obvious. Don’t spend more than you can afford or you’ll put yourself in a very unpleasant situation. This is not just how much cash you have in the bank, because you can borrow money – lots of it sometimes – and this may give you a false sense of being able to afford it. But what we’re talking about here is the whole kit and kaboodle of what the home will cost you, both now and in the long-run.
List out the running costs of a new much larger home. Include things like the rates, gardening, maintenance, and cleaning. Then look at what any hidden costs there could be. Then look at whether other living expenses may increase over time that could impact on your running costs. And spend some time studying what other costs could come up during the actual build such as extra permits or site works.
You can’t borrow more than the bank will lend you
And Step 2 is also fairly self-explanatory. You can’t borrow more than the bank will lend you. And there’s clearly a fairly good reason why the bank puts a cap on how much money they’ll lend you: it does include what the end value of the home will be, but mostly it’s around your ability to repay – in other words, your income less your expenses. Of course, shop around and see what different banks have to offer – you might be able to borrow more from a bank because of their conditions and terms, etc.
It’s also worth reading our other blog on the story of bank valuations. Just because the bank tells you a figure of how much you can borrow doesn’t mean that this is what will end up happening when the rubber hits the road – other things can affect it. This step is pretty important because all of the others that follow hinge on it, so do your sums carefully if you’re in the situation of needing to borrow money.
Look at what you really need
Step 3 is to look at what you really need – not what you want, that comes in step 5. Of course, a lot of the time, needs and wants align, but not always, and in a new home build, a few of these misalignments can cause you some money grief. We’re alluding to things like whether you really need that extra 4th or 5th bedroom. And is it really essential to have a double vanity, especially in both bathrooms? And that verandah right along the side would be a nicety but probably never get used.
And of course, look at the flip side of the coin – have you considered that an extra linen press would be very useful? And have you thought about vehicle storage that will work well for you? Analysing in detail what you really need is an excellent pointer on how much to spend on a new home, because there’s an old saying we’ve proved to be very true – ‘form follows function’. In other words, when you really sort out everything you need (function) everything else will fall into place (form).
And make sure the style of the home is going to outlast the fashions of the day and be valuable in the long-run.
Don’t spend it on things that aren’t going to be adding value to the home.
Step 4: Overcapitalisation. We’ve drilled into this in detail in another blog, but it has a particular bearing on the question of how much to spend. The trick here is to be smart with the money – don’t spend it on things that aren’t going to be adding value to the home. And make sure the style of the home is going to outlast the fashions of the day and be valuable in the long-run.
But also don’t be put off by a lower short-term bank valuation that makes you think you’ve overcapitalised when you really haven’t. Look long-term and think about how much the property will be worth in 20 years or even 30 years time. This will put a really interesting spin on how much to spend. You’ll find that perhaps you’re better off to spend a bit more to avoid compromising on what could be tremendous value in the years to come.
Where do your own personal tastes and likes come into it?
Step 5 – the ultimate question. Where do your own personal tastes and likes – or dislikes – come into it? The secret to being able to accurately answer this one is to make sure you’ve carefully worked through all of the other 4 points.
Let’s say you’re comfortably able to afford the home – which most people are able to – so that’s all good, and the bank is trying to throw more money at you than you need – which does happen, believe us – and you’ve thrashed out what you actually need and find that it’s all still stacking up.
And you know you’re building in a growth corridor and you also know you’re way ahead of overcapitalisation, so why not splash out on some of your own tastes!? And we agree, go for it, get that wishlist out and start ticking it off. Yes, put that special style of mudroom cabinetry in! And get that extra section of decking on for entertaining your friends and family. The list will vary as much as we vary as human beings!
And there you have it – there is some sort of process to work through to work out how much money you should spend on a new home. Admittedly it’s a very iterative process that will require a lot of back and forth, but it’s a process that does work and will give you peace of mind when the final moment comes of putting pen to paper to sign the contract.
You might wonder why your friend or colleague is spending more than you, or less than you, on a new home. But everyone’s needs vary; their incomes and lifestyles are different; you can’t all build on the same street, and everyone’s unique, so their tastes are unique as well. The end result is a different figure to you of how much they should spend on their home. Which makes perfect sense.
And as always, ask for advice!
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