Understanding Your Borrowing Capacity

Being approved for a home loan is an exciting moment.  But it’s important to understand your borrowing capacity before you commit to a mortgage.  Just because you can borrow a certain amount, doesn’t mean you should.

Here’s how to assess your financial situation to understand how much you can borrow.

Consider your existing financial commitments

In principle, your borrowing capacity depends on a  number of factors, including:

• your income
• your monthly expenses
• your existing debts
• how much deposit you have saved
• current interest rate
• type of loan
• whether it’s a principal, or principal and interest loan
• the term of the loan
• estimated repayments.

As a general rule, it’s not a good idea to allocate more than 30% of your monthly household income to re-paying your home loan.

Put together a budget

The best way to know what your borrowing limit might be is to create a budget – and stick to it.  Once you know what’s coming in and going out of your bank account, you’ll know how much you can afford to repay – and therefore how much you should borrow.

There are a number of different phone applications or websites that can help you put together a budget.  When setting your budget, make sure you consider factors such as:

• council rates
• body corporate fees (if applicable)
• insurance costs
• maintenance costs
• utility bills
• estimated groceries
• medical bills and health fund payments
• school fees
• phone an internet costs
• petrol and transport payments
• entertainment, travel and clothing
• other loans or credit card debts.

Think about the future

When putting together a budget, make sure you leave a bit of wiggle room in case things change.  It’s important to understand how a change in circumstances will impact your finances.  Anything form a hike in interest rates to an addition to your family will affect your ability to honour your financial commitment.

Talking to a mortgage broker can help you understand what you can and should commit to financially, but the final decision is yours to make.

Call Gail or Terry today to help you make an informed decision.