The amount you can borrow and the amount you should borrow are sometimes two very different things. Before you apply for a home loan, it makes sense to realistically assess your financial situation. Here’s how to do it.
Understand your borrowing capacity
Generally speaking, your borrowing capacity – what you can borrow – depends on a number of factors, including:
- your income
- your monthly expenses
- your existing debts
- how much deposit you have saved
- current interest rate
- type of loan
- whether it’s a principal and interest, or interest-only loan
- the term of the loan
- estimated repayments
However, knowing the difference between what you can borrow and what you should borrow is very important. As a general rule, it’s not a good idea to allocate more than 30% of your monthly household income to repaying your home loan.
Build a budget
To fully understand what your realistic borrowing limit might be, first of all create a budget – one you can stick to. Once you understand exactly what’s coming in and going out you can properly assess how much you can afford to repay – and therefore what you should borrow.
If you don’t feel comfortable drawing up the budget yourself, it’s a good idea to seek help. We have some simple budgeting tools available and the experience to help you with this.
Expenses to include in your budget include, but are not limited to:
- council rates
- home maintenance costs or body corporate fees
- insurance costs
- utility bills
- groceries and supermarket
- clothing and personal items
- medical and dental bills and health fund payments
- school fees
- phone and internet costs
- petrol and transport payments
- entertainment and travel
- other loans or credit card payments
- gifts to family and charities
Future-proof your figures
Remember to leave some contingency in your budget in case circumstances change. People can lose their jobs or get sick, or interest rates can rise, which could impact their ability to keep up with repayments.
It’s also important to think about some other things that may happen: Is your income likely to increase within the next few years? Are you likely to have children and incur increased living costs? Do you plan to retire shortly? These are all questions that only you can answer, and they will all have an impact on how much you should borrow.
Remember, lenders tell you how much you can borrow, but you know your personal circumstances better than anyone. So take control – it’s up to you to decide how much you should borrow!