Borrowing Within Your Means
While your lender will give you a amount as the maximum you can borrow, it is essential that you determine your own borrowing capacity when searching for your new home.
The choices you make when taking out a mortgage have long lasting implications – so you need to approach borrowing with a healthy attitude and should consult with your Naritas broker to get their opinion on what is feasible.
- How much you can borrow and how much you should borrow are two very different numbers. While your lender should not let you borrow more than you can afford, ultimately the decision is yours – so be careful not to over commit yourself.
- If you choose to go through your budget privately, it is important when determining your borrowing capability that you start by measuring your income against expenses including your proposed mortgage repayments. A good rule of thumb is that no more than 35% of your gross monthly income should go towards servicing your mortgage.
- Lenders use a similar method to work out how much to lend you. As a general rule, the bigger deposit you have and the higher your income, the more lenders are willing to lend. This is particularly the case following the global economic crisis as financial institutions have become even more risk averse.
Here are some factors to take into account when determining how much you should borrow rather than how much you can you borrow.
Do not overcommit. Borrowing too much can be a big strain on your personal life and lifestyle. Think about what aspects of your lifestyle you may be willing to give up, and those that you are not.
Obtaining your goal
Houses are like stepping stones – it is probably best to start with something affordable and move towards your dream home as your personal earning capacity and equity grows.
Plans for the future
Think about where you want to go in the future – both personally and financially. Are you a one or two income household and is this likely to change in the future?
Consider how any rate rise will impact on your ability to make repayments and factor that in when setting your borrowing limits. And do not forget that there are added extras when purchasing a house, like solicitors, Government Stamp Duty and application fees, as well as ongoing commitments, including council rates and utility bills – so consider these costs when determining how much you can borrow.
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