How Much Can I (AFFORD to) Borrow?

It’s easy to get carried away when planning for your first home.  The general practice is to hop onto a bank calculator to determine your maximum borrowing capacity.  Armed with that figure you might start searching one of the online real-estate websites or visit some house and land display villages.

This is actually a very dangerous approach.

Your budget is what you can afford to pay – not what a bank will lend you.

You need to establish that figure first and then find a home.  Do not find a home first and then try to make the budget fit the price.

A general rule of thumb is that you shouldn’t really be paying more than 30% of your income (after tax is deducted) on your home loan.  So if you NET $1,000 per week after tax, you should be aiming to keep rent or mortgage payments to $300.  That 30% is already about half of what your budget should be for essentials (shelter, food, bills, car).  Exceeding 30% will require cutbacks in other areas that may include savings or ‘fun money’.  You still need to live – your life isn’t a dress rehearsal for the real thing.

Don’t work backwards from a house price, work forwards from what you can afford.

Affordability is your income less your boring expenses and fun money.  There are certain things you need to do such as establishing a working budget, eliminate bad debts (consolidate credit cards and personal loans) and set aside some emergency money.

Then you can determine what a comfortable and affordable repayment level is for you.  If you are already renting then it’s easy – a starting point is your rental payment.  Repayments are determined by the loan size, the interest rate and the loan length.  Focus on loan size and the interest rate because lowering these will provide you with the maximum financial benefits and bang for your buck.

Home Loan Budget Affordability Calculator

Below you will find a calculator we created to help determine your affordable budget.

  1. Just enter a maximum amount you feel is comfortable and affordable for your weekly home loan repayment.
  2. Then enter an interest rate.
  3. The ‘max loan budget’ figure it comes up with is the budget for your home loan.  Please note, this ISN’T the maximum price you can pay but rather the maximum loan you can target.  You would add your deposit on to this figure for an indication of your target house price.

That figure will determine which established homes or house and land packages are within a comfortable and affordable price range for you.  If wanting to build your first home it will give you an idea of exactly which upgrades or variations you can afford to make without blowing the budget.

But don’t forget to build in a small buffer for increasing interest rates.  At the time of writing we are in a period of extremely low interest rates.  It is a good idea to build in some contingency for rising interest rates when doing your planning.  The calculator below will add in an interest rate increase of your choosing (I would suggest at least 1%).  This allows you to compare your current scenario with an alternative one that has a higher interest rate.

What next?

If the figures appear reasonable for you and there are established homes or house and land packages in the price range the calculator indicates is your affordable budget then please contact Moneybright or call 1800 90 88 42 to organise a discussion about your home loan goals.