Lately I have been looking for a flat to buy in Berlin. Not only for investment, but something that I could use for myself. I know, I am adulting so hard right now.
My reasoning is that instead of paying a monthly rental fee, I could use the money to shell out for mortgage. Initially, I was aiming for a property at a higher price. It is normally located in a better area and it looks nicer. However, I don’t want to end up being a house-poor. I still have a lot other expenses that I should cover on a regular basis. Therefore, I need to be smart about it.
After doing much research, I decide to follow the 30% rule of home-buying with a tweak.
Spend no more than 30% of net income on a monthly mortgage payment
The industry experts like to use the gross income for this calculation. Nevertheless, I realize that it can get me into trouble in the long run. If I base what I spend on housing on an amount that I might not be bringing home, that can stress my budget. Especially, since Germany has a higher income tax rate.
On the other hand, I could spend more since the mortgage interest rate in Germany is so low. Still, it is just safer to stay on the more affordable side of things. I still need to be able to take care of myself and my family with the remaining money every month.
Have at least 30% of the home value saved up in cash or semi-liquid assets.
Before buying a home, I should have at least 30% of the value of the home saved in cash. 20% is for the down payment. The other 10% is for a healthy cash buffer just in case I run into financial trouble.
It might sound very conservative but unexpected things can happen in life. A sudden job loss or a medical emergency can send even the most financially responsible person into a tailspin. I’d rather choose safe than sorry.
The bottom line
For the biggest purchase of my life, I should know all the math and how it plays out 20 years in the future.
I might or might not find my dream flat that fits my financial requirement in the next few months. No matter what I decide, the most important thing is to be responsible with my finances.