Are you new to investing? Don’t know much about it and would like to learn the tips to buy your first home? Good practices are often unknown to the general public, which is why it’s so hard for a young working person to buy a home. If you thought you only needed a pre-approval from your bank to get a mortgage, you’re wrong…
The 25% rule will allow you to build up your savings in a solid way.
One of the easiest ways to find out approximately how much you can save each month for your home is to know the 25% rule. This rule states that your loan should not exceed 25% of your net monthly income. If you have other debts, it is necessary (and logical) to add them to the potential monthly loan amount. Government and bankers’ recommendations generally set a limit of 33% of your net income, for people who are less informed and less aware of the risks involved. We tend to say that the younger you are, the better it is for you to have a high percentage because your future income will tend to increase (we wish you that): your loan being constant, this ratio will decrease.
One thing to keep in mind: the bigger the percentage of your savings, the closer your future home will be to your dream home, but the bigger the constraints and sacrifices you will have to make every month, and the bigger the risks in case of big expenses. You have doubts about your ability to save? Get advice!
Expenses other than the mortgage are also part of the equation
Getting your bank to agree to a loan is just the first step in the home buying process. New homebuyers need to account for the expenses associated with that loan to determine their optimal savings capacity. After all, the loan is not the only regular expense that a future homeowner has to deal with. There are maintenance costs, home insurance costs, utility costs (water, electricity, gas, etc.), government taxes, extraordinary expenses… Again, the best thing to do is to get advice from someone close to you who has already had to take out a loan in order to establish a list of potential expenses. In addition, you need to have somewhere a small financial nest egg that you can quickly withdraw to avoid having to suffer financially the day you have to change the toilet in your bathroom.
In short, all of these costs, as well as those related to everyday life, must be included to determine how much you can save.
The down payment should dictate the purchase
To avoid securing a loan, buyers are required to put 20% down on the purchase price. In fact, the bank generally requires the buyer to cover the notary’s fees, i.e. about 8%. If the deposit is not sufficiently substantial, the interest rates can rise. On the other hand, the bigger the down payment, the better your interest rates will be - or at least, the less interest you will pay over the life of your loan, and the smaller your monthly payments will be.
In addition to this advice, you also need to be smart and see if instead of putting more down payment into your loan, you can’t find a financial investment that would yield more than the impact on the loan you’re making. For example, if you have made a loan to the bank, and the bank sets the interest rates at 2% per year, and you, instead of putting 10,000 euros in your down payment, you invest it so that it earns you more, you win.
Choose a property that you can afford
It may seem obvious at first glance, but the French are greedy and are always looking for more assets to satisfy their happiness. Those who make their first purchase have many desires, and they often have eyes bigger than their stomach. An atypical house on top of a hill with a view of the valley can be the dream of your life, but some of the costs associated with this home can be mind-boggling. One way to determine if a home is affordable, in terms of budget, is to look at the location and size. After all, size isn’t everything, especially if heating or air-conditioning is a huge expense.
In conclusion, even if real estate is the favorite investment of the French, and being a homeowner can be everyone’s dream, buying your first home requires some simple calculations beforehand so as not to be surprised in case of a hard blow. Owning a large financial asset is good, but living without cash flow, “just in time” is a risk you have to be aware of.