How Much Can You Afford To Borrow?

Chances are, buying a home is the biggest investment you will ever make. Here's how to judge how big it should be.

Since few people pay cash, obtaining a home loan is the cornerstone of home ownership. How much you borrow depends on a number of factors:

    * Your income and expenses
    * Estimated repayments
    * Serviceability
    * Assets and liabilities
    * Your lifestyle
    * Your deposit

Tip: Your repayments should never exceed 35 per cent of your weekly pre-tax income.

Before you start looking for a home, think carefully about your spending habits. Compare expenses and income. Prepare a budget, noting all major upcoming expenses such as replacing the car, holidays, school fees, etc. Knowing exactly how much you spend each week is essential in determining how much you can afford to borrow. Having a realistic picture of your finances will avoid costly knock-backs.

Tip: Avoid being knocked-back for a loan. Lenders frequently trade credit information. A knock-back can harm your chances with another lender.

When deciding how much you can borrow, lenders will look at your serviceability - i.e. whether you can afford the repayments over the life of the loan, not just while interest rates are low. To do this, they use a benchmark figure based on average interest rates over many years. It is usually several percentage points higher than the variable rate.

Your repayments will also be assessed against your income. In most cases, the upper limit for minimum repayments is 35 per cent of pre-tax income (or 30 per cent of combined income for joint borrowers). Some lenders may use your uncommitted income - what is left over after all household expenses - to determine your repayment capacity.

To get a loan you must own more than you owe. Lenders will look carefully at your existing assets and liabilities. Assets include furniture, rugs, jewellery, your car, savings and investments you may have built up over the years. Lenders will assess your credit risk to determine whether you are likely to default on the loan. Factors like your occupation, employment history, where you live and past loans are used to build a credit profile. Your credit risk can influence how much you borrow.

Tip: The keys to getting a home loan are serviceability, collateral and credit.

Lastly, consider your lifestyle. Some people will happily sacrifice lifestyle to own their own home. Others find giving up dinners out, movies and overseas holidays very difficult. Think about what you are prepared to sacrifice and what sort of lifestyle you could realistically afford once you have a home loan. Owning a home will not mean much if your life is dull and unenjoyable.

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.