Figuring out how much money to borrow when getting that first home loan is a question we get asked a lot. Should you borrow the maximum amount you can afford? Should you aim a bit lower, give yourself some wriggle-room and borrow less? The answer won’t be the same for everyone, but that’s ok, because there are plenty of ways to find the answer that’s right for you.
Budget is key
In figuring out how much you should borrow, first, set an upper limit by doing the maths and finding out how much you can borrow. This means considering things like how big your deposit is, how much you can actually afford to pay each month (while still being able to afford groceries!), and, of course, how much the house costs. Go and see your bank or try one of the many online calculators available to help you do this. Once you’ve worked out the upper limit, you can work back from there and come up with a solid plan that lets you make the most of your financial situation.
Stay within your means
This is an easy one - always stay within your means. Transitioning from renter to home owner isn’t a case of simply substituting a mortgage payment for your rent payment. Owning your own home can include fixed costs outside of your mortgage repayment that you may not have had when you were renting. You’ll need to factor in costs like rates and insurance (home, contents and life) when considering what you can and cannot afford.
The last thing you want to find is that you can’t pay the bills once the mortgage has come out. This is why we sit down with people when they first come in to talk about a home loan - we want to make sure people have realistic cost estimates so they don’t overcommit. In fact, it’s always a good idea to build in a financial safety buffer when figuring out how much to borrow.
Put your buffer to work
That financial buffer means not stretching yourself too thin that you can’t cover unexpected costs, but that doesn’t necessarily mean having to have a stockpile of money lying around. You can put that buffer money to work in a couple of ways.
Depending on the type of loan you’ve chosen, you may be able to pay more than the minimum repayment each month and have the extra go straight towards the principal portion of your loan (rather than the interest), meaning you’ll pay less in interest and pay off your loan sooner. If things get tight for some reason, you can just revert to the minimum payments as needed.
Similarly, you could opt for an offsetting loan which achieves almost the same thing - any money sitting in your acounts (even if only for a few days) can be used to off-set the home loan, meaning you’re not paying interest on that amount - not only will you have savings on hand, but that money is also reducing your interest payments over time.
Climbing the property ladder?
If making your way up the property ladder is important to you, I’d encourage you to engage an accountant, solicitor, real estate agent and, of course, your bank beforehand as borrowing to invest in property carries with it a different set of risks. All these experts will have valuable advice on the best way forward for you.
Don’t bow to peer pressure
Everyone is talking about housing and the cost of home loans these days, so it can be easy to get caught up in what everyone else is doing. You’ll find there’s pressure from all corners, including stories in the news and from family and friends - they’ll all have different ideas on what you should be doing. For this reason it’s doubly important to have a clear plan as to affordability…and stick to it.