How much should I borrow on my home loan?
It’s not hard to work out your borrowing capacity. Every bank and Mortgage Broker has an online calculator that answers the question, “How much can I borrow?”. Working out how much you should borrow can be a little more difficult. Ultimately, you should borrow as much as you can comfortably repay.
The factors that lenders take into consideration in determining your borrowing capacity include the following:
Net income sources
How much do you clear?
Will 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 receiving rental income?
Do you have a car loan? HECS debt? A credit card debt?
Total credit card limit.
A high limit can decrease your borrowing capacity.
Other loan repayments.
Credit history
A bad credit history won’t help – but you should be honest.
Number of dependants
Do you have children or do you care for other people who are dependent on you?
Term of the loan
Are you taking out a 15-year or 30-year loan?
Interest rates
When interest rates are higher, your borrowing capacity will be lower.
Debt-service ratios
In determining your borrowing limit, lenders will use what is called the debt-service ratio. It is the ratio of loan repayments to your gross income. For single income earners, this ratio should not exceed 35%. For double income earners, the ratio should not exceed 40%.
How much can I borrow?
Use the Borrowing Power Calculator on our website.
How much should I borrow?
While Mortgage Brokers are bound by strict rules to ensure you don’t borrow more than you can service, ultimately only you can decide how much you should borrow.
What you should take into account
The lender’s main concern in determining how much you can borrow is “Can they repay the loan?”. They may not take into account a host of other personal matters – but you should. These include the following:
Income security: You know more than the lender about the security of your income. How safe is your job?
Family planning: You might not have children now, but are you planning to? And if so, will this mean going from two salaries down to one.
Job satisfaction: If you have a highly paid job, you can borrow more. But, if you don’t like your job, or it’s highly stressful, taking out a large mortgage can have long-term lifestyle implications.
Lifestyle: You might be able to afford to service a large home loan, but only if you have no social life whatsoever. You need to consider whether that’s a trade-off you’re happy to be making.
Other goals: Property ownership has become an occupation for Australians. But, there are other financial goals to consider – like providing for your retirement. And money isn’t everything. Will taking out a large mortgage mean you’ll never fulfil your dreams?
Only you can decide
That’s why the question should not be ‘How much can I borrow?’, but ‘How much should I borrow?’. And only you can ultimately make that decision. To learn more, talk to your trusted Mortgage Broker today.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.