How Much Should You Borrow When Securing a Mortgage?

If you are wondering how much you should borrow when buying a home, you need to consider how much you can comfortably repay. Our online home loan calculator helps you work out how much you can borrow but working out how much you should borrow can be a little more difficult.

Every lender has different requirements; most will review your income, financial commitments and debts. Essentially, banks need to consider the risks involved from their end when lending. They need to ensure you are in a comfortable position to be able to repay your loan now and into the future.

What the banks will ask:

Net income
How much you clear after tax
Do you have one salary or two?
Do you have other sources of income?

Stability of income

How long have you been with your employer?
Are you self-employed?
Are you working full-time?

Other loan repayments

Do you have a car loan, HECS debt, or credit card debt?
Do you use buy now pay later services?

Credit card/s

Do you have credit cards?
If so, how many?
What are the combined limits?

Credit history

What kind of credit history do you have?

Number of dependants

Do you have children?

Terms of the loan

Are you taking out a 15-year or 30-year loan?

Interest rate

What kinds of interest rates are you looking at?
Will you be able to afford a variable interest rate should the market change?

Debt-service ratios

In determining your borrowing limit, lenders use what is called the debt-service ratio – the ratio of loan repayments to your gross income. For single-income earners, this ratio should not exceed 30%. For double income earners, the ratio should not exceed 40%.

Things you should consider when determining how much you should borrow:

Do you have a budget?

While a bank will review how much you can borrow, they are considering these circumstances from their own risk assessment. Only you can review your situation and lifestyle to consider how much you can afford to repay and still live the life you desire. One of the best ways to do this is to create a comprehensive budget that looks at your income, expenses and how you can best disperse your money.

Need help putting together your budget? Download our free Budget Planner today!  

Remember to factor in unexpected expenses. In reality, things will happen when you least expect them – funny how that happens! The best way to manage these situations is to be prepared and have an emergency fund that you can access when and if these situations arise. In undertaking this process, it is often much easier to see how much you should borrow to achieve your desired lifestyle while looking at the bigger picture.

How much of your income do you feel comfortable putting towards your mortgage?

Typically, mortgage stress is defined as a situation where someone is spending more than 30% of their household income on mortgage repayments. However, it’s not always that straight forward. People may choose to pay more than 30% of their income to reduce their debt or, if they have a higher income, they may be in a position where they can comfortably attribute more than 30% of their income to their home loan repayments.

It’s important to review your circumstances to see what would work best for you. You may have an idea around how much you should borrow, but we suggest discussing this with your finance broker.

What associated costs might I incur?

Mortgage aside, there are several additional costs you should keep in the back of your mind when purchasing a new home, including:

  • Stamp duty
  • Insurance
  • Furniture
  • Landscaping and fencing
  • Rates
  • Bills and utilities

To learn more about these additional expenses, you can read our piece on Why First Home Buyers Must Budget for More Than a Mortgage.

Considering future circumstances

While it may be hard to anticipate what the future holds, it is best to consider future possibilities and how your circumstances might change, for instance, like having children. For most people, this will reduce their earning potential and may have an impact on how much they can comfortably repay.

Changes to your financial position

Ideally, we would like to think our income will increase over time. However, this isn’t always the case. While it’s a scary thought, it is worth considering what you might do if you or your partner lost their income. We suggest asking yourself these questions: How much money do you have in savings to support you during this period? Do you have income protection insurance? If so, what’s the waiting period?

If you would like to discuss income protection, feel free to speak with one of our financial planners today.

How can you improve your current financial situation?

Obtaining a home loan is one of the biggest financial commitments you will make within your lifetime. Inovayt Finance Broker, Margaret Wilcock, advises you should review your current financial position to determine whether there is anything you can do to pay off your current debts and improve your financial position. For example, if you have an AfterPay account perhaps it’s time to close it. If you have multiple credit cards, it may be a good idea to reduce these and the same if you have a personal loan. This will free up your income and may mean both you and the banks will increase your borrowing capacity.

While you may want to increase your borrowing capacity, Margaret advises, “Don’t borrow the maximum amount the bank approves you for. This will make things tight leaving you with no emergency or splurge money which means you may be put under financial stress in the future.”

With all of this in mind, the question of ‘how much should you borrow?’ has many considerations. There isn’t a right or wrong answer, but it’s important to consider as many variables as possible and to borrow the amount you feel comfortable repaying, as opposed to how much the bank has advised you can borrow.

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