Affordability: keeping it real

Given the current economic environment, it is more important than ever to have an accurate idea of what you can realistically afford when buying a new home. Here we look at some important items you will need to consider when assessing how much capital you will have available.

Much has changed in the financial landscape over the course of the last few years. The credit crunch of 2007, sparked by a sharp increase in defaults on loans to high-risk borrowers in the US, led to a financial shockwave that was felt around the world. In the UK, this resulted in a severe recession and the bail-out of a number of household financial names by the government.

Sadly, for UK homeowners this has also had a negative effect on the domestic housing market, where demand has fallen back markedly from the sharp rises seen in the middle of the last decade.

In addition, and perhaps more importantly, lenders have considerably tightened their lending criteria, making it far more difficult for home owners to gain the easy terms that were available around five years ago. As a result, home owners are now more likely to sell their homes before buying in order to avoid being exposed to an uncertain market.

What is your current property worth?

Given this setting, the need to make an accurate estimate of what you might be able to sell your current property for is obvious. One place to start your search is to look at the prices that properties similar to yours are being marketed for in your area. Thanks to the internet, this can be done easily using well-known websites such as www.espc.com and www.rightmove.co.uk You can also drop in to your nearest solicitor or property agent to discuss.

You might also want to search for other websites that offer house price data on completed transactions, such as www.housepricescotland.com while www.nethouseprices.com can offer similar information for properties in England and Wales.

With this information, combined with an assessment of the relative condition of your property, you can make an estimate of what you might be likely to receive in the market. Be aware, however, that although it is tempting to inflate your intended asking price when making your assumptions, in slow market conditions an unrealistic asking price will most likely lead to few, if any, viewings for your property.

Do you have any savings available?

Next you will need to add together the total amount of savings and investments that you have available to contribute to your purchase. This might include savings accounts, stocks and shares, Premium Bonds, ISAs and other products. A sensible approach is needed here, as it is sometimes tempting to cut payments to pensions and other savings vehicles when considering available monies. We would always recommend speaking to your financial adviser before taking any such decision.

Transaction and other costs

Finally, you should consider the actual cost of the transaction itself. First you’ll need to account for your current mortgage and any early redemption charges that may be applicable. The other obvious cost is stamp duty.

Other charges to consider are the fees for Home Reports and those charged by your solicitor or estate agent on the sale of your existing property. These can range from between 1% to as much as 3%. Conveyancing, land registry, as well as marketing fees (e.g. producing a schedule or listing your property on www.espc.com) are also significant costs. To gain an idea of what these costs are likely to be, a solicitor or estate agent will be able to give you a quote, as well as make suggestions as to whether any potential improvements you have planned will actually increase the price you are likely to receive for your property.

Finally, it is important to think about other supplementary outlays such as the cost of packing and moving, putting any items into storage or booking pets into temporary accommodation while you finalise your move.

Once you have this information, add your estimated selling price of your current property together with any available savings you might have. Then subtract your current mortgage and expected fees. This should provide you with a reasonable estimate of the deposit you will have available to secure a mortgage for your new home. Remember, it is prudent to try to keep some money aside for emergencies or other unforeseen events.

Another important element to consider is the actual cost of living in your new home. Alongside the cost of the mortgage and any indemnity fees you may be charged, consideration must also be given to other items such as your revised buildings and contents insurance, heating and electricity for your new property, any servicing or factor costs and council tax if you are moving to a new tax band. Even travel costs, if you have moved away from an established transport route, and the cost of your television/telephone/broadband provider if you need to change, should all be accounted for.

For more information, there is a wealth of material available from sites such as www.moneymadeclear.org.uk and www.direct.gov.uk which will help to point you in the right direction.

Remember, planning and preparation are the key to a successful house move. Maintaining an accurate and realistic appraisal of your financial situation will allow you to act decisively when it matters most and, more importantly, will help you to avoid over-committing yourself financially - a situation that can have disastrous consequences.