What you can borrow and what you should borrow can vary greatly. The amount between the two can be the difference between buying a property you can purchase and settle or proceeding to soon learn you’ll be loosing your deposit plus other penalties.
Before purchasing a property it’s quite important to establish your borrowing capacity in advance. In this market insight we discuss this in more detail.
Understand your borrowing capacity
Your borrowing capacity is the first step in identifying what you can borrow. Learning what you are in a position to buy before shopping will ensure you look at properties relevant to your budget. It’s never a nice feeling falling in love with a property that is over $100,000 more than what you can borrow. However, knowing the difference between what you can borrow and what you should borrow is very important. A pre-approval or indicative approval isn’t a formal approval. The bank may indicate their support, but if the property, location or change of your personal circumstances occur after, this can be problematic.
It’s not a good idea to allocate more than 30% of your monthly household income to repaying your home loan. Shopping for a property based on what you can afford is a safer guide.
Establish a cash flow budget
As part of understanding what you can borrow you’ll need to establish a cash flow budget. When doing so, look at your net income and subtract your expenses based on a weekly or monthly basis. This will allow you to identify if the loan repayments will fit within your net cash flow.
It is also quite a wise decision to practice your budget before you own a property. Create a simulation version of your own cash flow and learn how the extra costs effect your cost of living. This is really helpful for first home buyers who haven’t had a lot of experience owning a home.
There are many different types of expenses that can easily be over looked. Don’t forget to add in your memberships, travel expenses and allocate some money to meet some personal entertainment or shopping. There are many great online calculators that help. If you are unable to calculate your own cash flow budget, perhaps you consulting a financial adviser.
Review the new expenses that will occur with buying the property
Once you’ve established a cash flow budget you also need to consider the property outgoings as these are additional holdings costs that may not be in your current budget. This is a great early step for first home buyers who haven’t had the responsibility to own a home before. Property outgoings include, building and content insurance, council and water rates, owners corporation fees (if applicable) to name a few. If you plan to occupy the property, you’ll need to also consider utilities such as electricity, gas and water usage.
In summary
What you can borrow and what you should borrow can vary greatly. Don’t over expose yourself and place unnecessary pressure. Borrow within your means so you can keep your quality of life while paying the loan repayments. Buying a property is very exciting and likely one of the best financial decision you may make. However it does involve a long term commitment so always stick to what you can borrow.
The lending landscape can be quite complicated and its for this very reason, we recommend consulting a mortgage broker. They can help provide you with both your borrowing capacity and your loan application. Having a professional support you will ensure you make an informed decision.
If you are thinking of buying a property off the plan or want to learn more about it, please feel free to contact us. We would be delighted to help you make the right decision.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more please contact us. We welcome the opportunity to assist you.
December 2020
