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How much should I borrow for my mortgage?

Jessica Yun
(Photos: Getty)
(Photos: Getty)

First-home buyers have no shortage of things to worry about: saving for the deposit, getting a loan, and all the other costs involved in buying a home.

You’ll want all the help you can get – but how do you figure out how much you can afford to borrow?

According to the Financial Planning Association, there are three key things to consider before you buy your first house.

1. Lending criteria

Different lenders will have slightly different criteria for assessing your application and your personal and financial circumstances, according to the Association.

But they will be asking you for the same information from you, which is your income, assets, existing loans, expenses, credit rating, and any dependants, so make sure you’re ready to dedicate time to putting all this information together and coming to terms with how your borrowing capacity might be affected by your overall financial position.

According to the Association, as a general rule of thumb, the lender will lend up to 80 per cent of the property’s value if they’re satisfied you can afford repayments.

If you’re prepared to pay a Lenders’ Mortgage Insurance (LMI), which is a one-off premium that protects the lender if you default on your repayment, you might be able to borrow more.

2. Your home-buying budget

Make sure you know you can take on a loan you can “comfortably” repay, the Association said. It means you’ll have to ensure you can factor it into your household budget.

“There has to be a surplus in your cash flow to cover repayments for the life of the loan,” said Strategic Planners financial planner Sandy Hopps.

“People often underestimate just how much they actually spend from month to month so I’ll always do a proper audit of client’s accounts to understand their real cash flow and budget position.”

ASIC has a mortgage calculator tool that can help you figure out how much your repayments should be based on the amount borrowed, or how much you can borrow based on your repayment.

What you don’t want to happen is to fall into mortgage stress, which is when more than 30 per cent of your income goes to your home loan.

3. The extras

Not only do you have to factor in all the present-day costs, but you’ll also have to budget for maintenance, repairs, improvements and all the future expenses to come.

Don’t forget that interest rates could rise down the track, which will have a knock-on effect on your loan repayments.

Like property values, interest rates can change, Hopps pointed out.

“Interest rates in Australia have been low for a long time now and can only go in one direction from here.

“Any borrower needs to ask themselves what sort of impact it will have on their finances if interest rates – and repayments – rise.”

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