How much debt can you afford?

Should you borrow as much as a bank is willing to lend you?

When your application to borrow is submitted, the lender will assess your financial situation and come up with a maximum borrowing capacity. This number is the absolute max they are prepared to lend to you. Although tempting to maximise this figure, it is wise to actually think about what loan repayments you can handle without becoming a slave to the bank.

The choices you make when taking out a mortgage have long lasting implications – so you need to approach borrowing with a healthy attitude. When determining your borrowing capability, start by measuring your income against expenses, including potential mortgage repayments.

While everyone’s circumstances and expenses are different, a good rule of thumb is that around 35 per cent of your gross monthly income should go towards servicing your mortgage. As a general rule, the bigger deposit you have and the higher your income, the more they should be willing to lend.

Here are some factors to take into account when determining how much you should borrow.

How much debt can I handle?

Don’t over commit. Borrowing too much can be a big strain on your personal life and lifestyle. Think about what aspects of your lifestyle you may be willing to give up, and those that you can’t.

Am I being realistic?

Houses are like stepping stones – it’s probably best to start with something affordable and move towards your dream home as your personal earning capacity and equity grows.

What are my plans?

Think about what the future holds – both personally and financially. Are you a one or two income household and is this likely to change in the future? Private school or public school? Local or international holidays?

What about interest rates?

Consider how any rate rise will impact on your ability to make repayments and factor that in when setting your borrowing limits. And don’t forget, there are added extras when purchasing a house, for example, stamp duty, property inspections, solicitors and application fees, as well as ongoing commitments including council rates, possible strata or body corporate costs and utility bills. Consider these costs when determining how much you can borrow.