You play with the thought to buy a real estate? Then you should know how much you can afford to spend. We explain how to calculate your budget and what you need to consider.
From Dr. Christian Mulder
Published on December 29, 2021
The thought of owning a property also raises the question: How much house or apartment can I afford?? One of the most crucial questions. Because without a budget the search for suitable objects is not worthwhile. However, looking at your bank account is not enough to answer this question. Because, as a rule, you will have to take out a loan for the purchase of real estate.
- How much house can I afford?
- Rule of thumb for budgeting
- How to calculate your budget
- Deduct expenses from your net income
- Your age affects the amount of the loan
- Can I afford a house with my income?
- Calculation example
Let's calculate how much house you can afford to buy
You can afford a property of 526.316 € with an estimated monthly installment of 1.754 €.
However, you will be surprised how much you can afford. Because often prospective real estate buyers underestimate their starting position. The house budget calculator of Hypofriend gives you already a good insight, how much money you could spend on a property.
How much house can I afford?
When planning your budget for a property, there are two rules you should follow:
You must be able to pay the monthly installments on the loan with your net disposable income.
You should have enough savings to cover the incidental costs of the purchase from your own funds. This includes land transfer tax, notary fees, costs for registration in the land register, and the broker's commission if the broker was involved in the arrangement.
Rule of thumb for budget planning
For the planning of your budget plays a combination of the two points above a role. The more equity you use, the higher the ratio of your loan to your net income.
The ratio of the loan to the value of the property is also called the loan-to-value ratio. Assuming the property has a loan-to-value ratio of 200.000 euros. You borrow 180.000 euros from the bank. Then the loan-to-value ratio is around 90 percent. The more equity you bring to the table, the lower the loan-to-value ratio. Accordingly, you can borrow more money from the bank.
100 percent loan-to-value ratio means 100 x the net income
90 percent loan-to-value ratio means 110 x the net income
80 percent loan-to-value ratio means 120 x net income
With a net income of 3.000 euros and a loan-to-value ratio of 100 percent, you would need a loan of 300.000 euros. At 90 percent loan-to-value ratio, you have 330.000 euros available and at 80 percent 360.000 euros.
The less money you have to borrow from the bank, the lower the interest rates. The more money the bank lends you, the higher the risk for the bank. This risk can be offset by higher interest rates. So if you don't have to borrow quite so much money, this has a correspondingly positive effect on your monthly burden.
How to calculate your budget
First you have to calculate your net income. This does not only mean your paid salary, but your actual net income from all earnings. That is, money such as alimony, child support, rental income, capital assets and other payments are included in the calculation.
Subtract expenses from your net income
After you know your net income, you subtract your monthly expenses from it. This includes everyday items such as groceries, memberships (clubs, fitness studio, etc.), etc.), car, insurances and additional costs.
By the way: Even as a real estate owner you have to pay additional costs. As a rule of thumb, four euros per square meter applies to all ancillary costs of a property. This includes, for example, fees for garbage collection, heating and water consumption.
You do not have to add your previous rent to your monthly expenses. Finally, it falls away when you move into your own home. Your current rent is a good indicator and shows you how high your monthly repayment can be.
Your age affects the loan amount
With the repayment you determine how fast you pay back the loan. The repayment rate is at least 1 percent. Of course, it can also be higher. One percent means that you repay one percent of the loan amount per year. The lower the repayment, the longer the repayment time.
If you are still young and your pension is still a long way off, you can set a lower repayment and pay less each month accordingly. If, on the other hand, you only have 15 years until you retire, you should increase the repayment in order to finish paying off the loan before you retire. However, this will increase your monthly burden and you may be able to afford less. Because the repayment plus the interest for the loan together are the annuity. This should be less than 35 percent of your net income.
For example, if you repay three percent and the interest rate is one percent, the annuity will be four percent. To calculate your repayment, you can use our online repayment calculator.
Can I afford a house with my income??
After you have calculated your monthly budget, you can use the Hypofriend mortgage calculator to check how high your loan can be. To do this, you enter the place where you want to buy a property, the purchase price, your equity and the repayment. Then you get the monthly installment and the interest rate. You can play around with the parameters and try them out.
Assuming you want to buy a property together with your partner. Your total net salary is 4.000 euros. You have no other income.
You pay 100 euros for your mobile phone contract, 50 euros for the gym, the gas tank costs 200 euros, you spend 800 euros on food and restaurant visits and the shopping budget is 350 euros monthly. All insurances add up to 250 euros and the utilities for your 80-square-meter apartment are 160 euros per month.
If you now subtract all these expenses from your net income, you still have 2.000 Euro left. This would mean that the monthly annuity would be around 1.should amount to 400 euros. This is because banks generally only grant loans with a maximum burden of 35 percent of net income.
If you are around 30 years old, you can probably repay at 2%. For a loan of 500.000 euros per month, this would be around.250 euros. However, if you are 50 years old, you will probably have to repay at 4%. In this case, the installment would be around 2.100 Euro and well above the budget.
Therefore it is important to consider the personal life situation such as age in the financing.
You are not yet sure whether it makes more sense to rent or buy? Then use our online rent-or-buy calculator here.