How much do you need to borrow for a house

Just because you have been approved for a loan for $max does that mean you should borrow the full amount? It’s a question we frequently ask loansHub customers and it’s a particularly important one to ask yourself when it comes to borrowing money to purchase property.

Borrowing capacity

Once your financial commitments have been evaluated by your lender, they will tell you how much you can borrow – your ‘borrowing capacity’ – but it is important to assess this amount carefully.

It’s not the straightforward guide that it might look like. While a lender may be willing to lend you one amount, it’s important to consider carefully how large a mortgage you can personally manage. It may actually be less than your borrowing capacity.

With interest rates at historically low levels, the cost of borrowing has become more affordable. But the financial environment changes constantly and what you can afford today might not be what you can afford tomorrow. 

It is also wise, when assessing your capacity to borrow, to include a buffer for interest rate increases of a percentage point or two – because things never stay the same.

Mortgage stress is commonly defined as the need to spend more than 30 per cent of your monthly income on home loan repayments. This may well put extra strain on your income and lifestyle.

While this figure may be a useful guide, it will not necessarily mean the same to every income level and every home buyer or investor.

Instead, you need to think about your own propensity to take on debt and what level of debt might be too stressful for you.

Lifestyle factors

When considering how much debt you want to take on, you need to take a look at your lifestyle and how willing or able you are to make adjustments to the way you live.

If you’re happy to curb your spending, you may be able to manage a larger debt, but if overseas holidays and dining out are high on your agenda, you may need to compromise on your property price tag.

What’s the use of having the biggest house or being in the most affluent suburb if you cannot afford to maintain a few perks like occasional dinners out or holiday? So, borrow a reasonable amount, live within your means and this will ensure you are able to maintain the level of lifestyle you want.

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This article via Which Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.