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Servicing a Mortgage: How much should you borrow?

Every house hunting expedition should start with a well-researched, realistic budget.   How much should you spend on a property?  How much should you borrow?

Lenders set specific criteria to determine the amount they will let you borrow.  Their analysis will take into account your assets, regular income, expenses, debt level and credit card limits.  This analysis usually results in “pre-approval” for the maximum amount they are willing to lend to you.

Should this be your budget?  Not necessarily.

Can you COMFORTABLY and CONFIDENTLY make loan repayments on that mortgage amount for the next 20 to 30 years?

Consider these factors before hitting the “open for inspection” trail:

 

Percentage of income

Most financial advisers suggest that mortgage repayments make up no more than 30% of gross income.  More than 30% is defined as “mortgage stress” – something you’ll definitely want to avoid.

 

Percentage of property value

If you borrow more than 80% of a property’s value, you’ll be up for Lenders Mortgage Insurance (LMI).  While you pay for this insurance, it actually covers the bank’s costs if you’re unable to make mortgage repayments.  LMI allows you to buy property with a smaller deposit, but it can be a significant expense – up to $22,000 for a $600,000 property.

 

Running costs

Owning property comes with running costs such as council and water rates, insurance, maintenance, Body Corp fees, management fees and even increased travel costs if you’re moving to a different area.  Have you covered these extra expenses in your calculations?

 

Do you have a buffer?

Will you still be able to service your mortgage if interest rates rise?  Or if you lose your job or start a family?  Having a “buffer” up your sleeve is crucial given the many life changes that occur during a long mortgage term.   Maxing yourself out at the beginning of a loan is only asking for trouble.

 

Buying a property is probably one of the biggest investments you’ll make – and getting the price right is the first step to success.   

 

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