When it comes to buying a home, one of the first questions you need to ask is: “How much can I borrow?”
While your lender will make the final assessment about how much they are prepared to lend, it is essential that you make your own assessment of your finances first.
Your goal is to determine what you can comfortably afford to repay towards your mortgage each month, not just how much can I borrow, this will then help establish what you are able to borrow.
Prepare a how much can I borrow budget
The best place to start is to add up all your regular monthly outgoings and then subtract this from your net income.
Your outgoings include any regular commitments such as car or personal loans, credit card and store card repayments. Also add up other regular costs such as school fees, club memberships, monthly living expenses and your monthly discretionary spending.
Do not include your current rental commitments into these figures. It will no longer be relevant once you move into your new home as you’ll be paying off your mortgage.
Now look at your income. This should include your after tax salary, dividends on investments, rental income and any other funds that flow in over the course of the month.
The dollar amount you’re left with will give you an indication on what you have available to pay towards your mortgage each month as things currently stand.
Interest rates aren’t always this low
The most important factor to consider is that if you have a variable home loan rate your mortgage repayments will increase as interest rates start to increase. Economists expect the cash rate to rise in the next 12 months so be sure to factor this into your mortgage repayments and household expenses.
A home loan is a life changer
It’s also essential that you consider exactly how much you are prepared to let your home loan change your life.
The benefit of assessing your borrowing capacity is really twofold, to ensure that you don’t borrow beyond your means but also to help identify where you can realistically cut back if needed.
What are your future plans, be sure to take into consideration other personal factors, such as plans to have a family, or any dreams to travel.
By following these four tips your “How much can I borrow?” figure will instead show you how much you can comfortably afford, making for a more affordable and stress free mortgage.