What Loan Can You Really Afford?
How can I work out what the bank will lend me?
Your lender will assess your loan and affordability to estimate a maximum borrowing amount.
However, it’s essential that you work out what you can afford and what repayments you feel comfortable with.
The choices you make when taking out a mortgage have long lasting implications – so you need to approach borrowing with a healthy attitude.
When determining your borrowing capability, start by measuring your income against expenses, including potential mortgage repayments.
While everyone’s circumstances and expenses are different, a good rule of thumb is that no more than 35% of your gross monthly income should go towards servicing your mortgage.
So, if you earn $8,000 per month, $2,800 is a good range for mortgage repayments.
The Lenders perspective
Lenders will also need to assess your circumstances to work out how much to lend you.
As a general rule, the bigger deposit you have and the higher your income, the more they should be willing to lend.
All lenders will need to determine a loan suitable to your circumstances but mortgage managers can get to know your circumstances personally – and may have a little more flexibility than the banks to consider applicants on a case-by-case basis.
Here are some factors to take into account when determining how much you should borrow.
How much debt can I handle?
Don’t over commit. Borrowing too much can be a big strain on your personal life and lifestyle. Think about what aspects of your lifestyle you may be willing to give up, and those that you can’t.
Am I being realistic?
Houses are like stepping stones – it’s probably best to start with something affordable and move towards your dream home as your personal earning capacity and equity grows.
What are my plans?
Think about what the future holds – both personally and financially. Are you a one or two income household and is this likely to change in the future?
What about interest rates?
Consider how any rate rise will impact on your ability to make repayments and factor that in when setting your borrowing limits. And don’t forget, there are added extras when purchasing a house, for example, stamp duty and mortgage duty, relevant property inspections, solicitors and application fees, as well as ongoing commitments including council rates, possible strata or body corporate costs and utility bills. Consider these costs when determining how much you can borrow.