Borrowing To The Max – How Much Is Too Much? - September 2021
By Guest Blogger, Louisa Sanghera, Principal Broker,
A bank might be prepared to lend you a big sum of money to buy a home, but should you borrow up to the maximum you’re able to get?
Let’s say you approach a bank or lender for a home loan, and they come back with the following reply: “Congratulations! We’re willing to lend you $1m!”
This is great news – right? Suddenly, your dreams of owning your own home, painting your walls any colour you like and creating your own little sanctuary step closer to becoming reality.
Finding out you’re able to borrow money to buy a home is a fantastic feeling (telling someone that we have been successful and can arrange their finance is one of my favourite parts of my job!).
But is it a smart thing to borrow the maximum amount you can?
How much you borrow vs how much you can afford
The amount that a lender is prepared to lend you isn’t always the same as the amount that you feel comfortable to borrow.
If the bank is saying they’re willing to lend you a certain amount, first of all, that’s a good sign. Banks are only prepared to give you a loan if they think you’re genuinely in a position to pay it back. They crunch the numbers and analyse your expenses to work out how much they think you can handle.
But that doesn’t mean you should necessarily use their upper borrowing limit as your shopping limit. It’s really important to use your own instincts to decide what you're comfortable with, and to consider how your circumstances might change over time.
For instance: let’s go back to our earlier example and assume the bank is prepared to lend you and your partner $1m. Right now, you’re both earning good money and you can comfortably afford the repayments (assuming a fixed interest rate of 2%, your repayments on a principal and interest home loan of $1m would be around $3,700 a month).
This repayment seems easy to manage, especially considering you’re already paying $900 a week in rent. But, you can see a time in the future where your income will change.
Perhaps you'll want maternity leave in the next few years? Or one of you wants to take a break from your job to launch your own business? Maybe you see yourself moving to a different career with a different pay packet.
The point is, your situation can change (the last 18 months has really shown us all just how much!).
So the important thing to do is to stress test your budget.
This means: make sure you can still afford the mortgage if you suddenly lose one income. Do you have enough savings in the bank to cover you, if you or your partner loses your job? Financial experts say having 6 months’ worth of living expenses set aside as savings is ideal.
Consider your savings account balance, your future plans and the safety and security your career offers you, now and down the track. When you weigh all of these things up, you can then decide how much you’re comfortable borrowing?
This brings me to my next point: it’s not just a matter of working out how much you’re comfortable borrowing, but also, how much you’re comfortable spending. I’ve had many conversations with home buyers recently who are so discouraged by the current market.
Prices are increasing, conditions are very difficult for buyers and the whole experience of trying to secure a home can be very disheartening. More than one person has asked me: “Should I just keep waiting for the market to stabilise, or should I jump in now?”
There’s no ‘one size fits all’ answer here, but here’s one thing I know for sure: waiting rarely serves a buyer's best interests. If you waited from last year to this year, you’ll be paying a lot more now than you would have 12 months ago. In some markets, Sydney in particular, prices have increased a huge amount.
The prediction is that price growth will be slower next year, but it’s very unlikely that prices will go backwards. There might be less competition if you wait, but it’s impossible to tell exactly where the market will go.
Overall, my advice is to consider the bigger picture. Property is a long-term investment that increases in value over time, and 20 years from now, you’ll be less concerned about the exact price you paid and more concerned that you got into the market at all.
In my view, the only reason to wait is because you want to, it suits you, or you could use extra time to get your finances sorted. You should NOT delay buying a property because you're trying to time the market.
Keep in mind that low interest rates are likely to be here to stay for quite a while, so the opportunity to borrow with very cheap loans will be here for some time. If you need help working out what your options are in terms of buying a house and arranging finance, contact our friendly team of mortgage brokers today.
Louisa Sanghera - Director and Principal Award-Winning mortgage broker at Zippy Financial
Louisa created Zippy Financial after a 25-year career in banking, with the goal of using her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients grow their wealth through smart property financing. Whether you are looking to buy your first home, re-finance or build your property investment portfolio, Louisa and her team of experienced brokers can help guide you through the challenging maze of finding & securing exactly the right loan for you.
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