It's not that hard to work out your borrowing capacity. Every bank and mortgage broker has an online home loan calculator that answers the question, "How much can I borrow?". Working out how much you should borrow can be a little more difficult.
The factors that lenders take into consideration in determining your borrowing limit are:
Stability of income
Other loan repayments
Total credit card limit
Number of dependants
Term of the loan
In determining your borrowing limit, lenders use what is called the debt-service ratio - 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%.
While MFAA-accredited members are bound to ensure you don't borrow more than you can service, ultimately only you can decide how much you should borrow.
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:
You know more than the lender about the security of your income. How safe is your job?
You might not have children now, but are you planning to? And if so, will this mean going from two salaries down to one?
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.
You might be able to afford to service a large loan, but only if you have no social life whatosever. You need to consider whether that's a trade-off you're happy to make.
Property ownership has become a preoccupation 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?
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 an MFAA member today.