So you want to buy a house, great but have you considered the real cost of buying that house?
This only applies if you are planning to use a home loan to pay for the house i.e. a mortgage.
What do I mean by real cost? I mean the price of the house plus all the extras you would pay:
First you have your deposit: a percentage of the house price that you have to pay up front.
Secondly you have the remaining balance: the house price minus the deposit still to be paid.
You then have your interest rate: the more you borrow, the higher the interest rate will be.
Finally you have your mortgage duration: the longer it is, the more you’ll pay over the years.
In this blog, we talk about the real cost of buying a house by giving some real world scenarios.
We also talk about how to reduce the duration of your mortgage using some real examples.
Finally we discuss how you can play with the numbers yourself and where to go for more info.
Home Buying 101
Most first time home buyers do not realise how much their future house would actually cost:
Let’s say that you want to buy a house that’s £400,000 – the average cost of home prices now.
You save up a deposit of £40,000 – 10% of the house price, a considerable amount of money.
That means the remaining balance is £360,000 which you would request for your mortgage.
At the time of this writing, the average mortgage rates in the UK right now are around 6.25%.
So to summarise, here is what you would be looking for from your potential bank or lender:
- You are looking to borrow £360,000
- Your interest rate would be 6.25%
- Let’s say that you choose to pay it over 40 years in order to reduce your monthly payments.
So to buy your dream home, how much will you actually be paying over these next 40 years?
The Real Cost of Buying a Home
To buy this house, here is how much you would actually be paying over the next 40 years:
- £40,000 deposit – this is how much you would have paid upfront in order to buy the house.
- £360,000 principal – this the remaining balance of the house that you would have to pay back.
- £568,816 interest – this is the amount of money you’d also have to pay back to the lender.
You read that correctly: £568,816 in interest for borrowing £360,000 to pay for your house.
That means that a £400,000 house will cost you £968,816 – almost £1 million after 40 years.
Most buyers focus on their monthly payments, comparing it to what they used to pay in rent.
But they need to look at the total cost of the loan over the long term, not just the short term.
I would ask myself: do I still like the same house for almost £1 million? The answer is no way!
But the question is: what can I do to still buy this house but pay as little in interest as possible?
How to Reduce your Home Buying Expenses
This would be my approach to not just reducing the interest, but for home buying in general:
- Interest Rate: Shop around for the best interest rate, and the duration of that interest rate.
- Affordability: Buy a house you can easily afford and look to borrow as little money as possible.
- Pay Extra: As with any loan, make sure to pay extra principal on the mortgage every month.
You can save a lot of money and shave years off your mortgage by paying extra every month.
So here is where we currently stand with our mortgage without paying any extra per month:
| Monthly Payment | £2,044 |
| Duration | 40 years |
| Total Payments | £928,816 |
| Total Interest | £568,816 |
Why you should Pay Extra towards your Mortgage
Here is what would happen if we kept the same interest but just paid £587 extra every month:
| Monthly Payment | £2,631 |
| Duration | 20 years |
| Total Payments | £631,522 |
| Total Interest | £271,522 |
What would happen if you take it a step further and paid an extra £1,998 every month:
| Monthly Payment | £4,042 |
| Duration | 10 years |
| Total Payments | £485,050 |
| Total Interest | £125,050 |
The Results are In
As you can see from the figures in the tables above, the payment results speak for themselves:
- By paying just an extra £587 per month, you are essentially cutting your 40 mortgage in half!
- By paying an extra £1,998 per month, you are in effect paying off your mortgage in 10 years!
These are just 2 random figures, you may choose to pay less or more than this every month.
However, if you’re looking to pay off your mortgage early, you need to overpay each month.
If you want to play around with the figures, check out this Mortgage Overpayment Calculator.
Just plug in your numbers for your house, follow the instructions, and watch it do its magic.
Are you overpaying on your mortgage? How is it going? Let me know in the comments below.
If you enjoyed this blog article, feel free to check out my other articles on personal finance.
If there are other personal finance topics you’d like to discuss, let me know in the comments!
