“So Dylan how much do you think I can borrow?” Ah, if I got a $1 for every time that got asked this I would have enough for a home deposit.
I’m in finance, so helping people acquire and structure the most suitable finance solutions whether that be buying property, a car or even a commercial venture so it would be an expected question. Really, the better question to ask is “So Dylan how much do you think I should borrow”. These are two very different questions and the latter is the one people don’t always think about carefully because too often our emotions get in the way. We are human, and humans are emotional creatures, when you combine that with the fact that we are a ‘buy now worry about the consequences tomorrow’ society it allows for people overextending themselves on a purchase.
How much can I borrow?
When you go to your mortgage broker and ask him how much you can borrow, he will go back to a variety of lender’s and tell you what your maximum limit (often known as your ‘borrowing power’) the bank is willing to lend. While the banks have recently made changes to protect the consumer from any potential overexposure, by going to your ceiling means that you are potentially at the greatest risk of being overexposed. This is not to say that anyone that goes to their max borrowing is going to be a substantial risk because of the measures banks put place to protect us from getting in too deep, what I am simply saying that you need to think about what is right for you. Everyone has different lifestyles, jobs and risk tolerance which means there is no blanket solution and thought has to be factored into your current situation as well as possible future changes, before making a decision on what the right amount is for you.
After all, there is no point in borrowing the maximum to purchase a beautiful property only to find that you are constantly stressing about how you are going to repay the mortgage. Finding the right balance is the key to a successful purchase and will allow for the most enjoyment.
What does a suitable loan look like?
A suitable home loan is measured by the balance between being able to purchase a property and being able to comfortably meet the repayments. You will be shown the associated repayment schedule for a range of loan amounts available, and ultimately decide which amount suits you and your lifestyle.
How do I know how much I should borrow?
This is where you need to work closely with your broker, accountant or someone who you can trust (preferably with some sort of financial qualification) to really nut out what’s most appropriate for your situation. To work out the right amount you should borrow I would recommend answering the following questions honestly;
- What is my experience (have I previously been in debt, what is my track record of repaying debt)?
- What is my risk tolerance?
- Do I see any unforeseen changes to my current situation (loss of job, change of career, starting a family)?
- Does my lifestyle need to change by taking on this debt (am I willing to give up the luxuries)?
- Will I be able to save or put money away on top of repayments for a rainy day?
- What would happen if interest rates went up 1% or 2%? Could I still repay my mortgage?
- What is my exit strategy (my just in case plan)?
If you can answer all of these questions and still be comfortable with the answers than you know that you are borrowing the right amount. By taking the time to be honest with yourselves you won’t get caught up purchasing beyond your means and getting a “purchasing hangover” which can result in added anxiety and stress.
I hope I haven’t scared the pants off anyone I just like to make sure a careful and calculated approach about borrowing money is taken, so it can result in a happily ever after outcome. If you would like to chat more about how much you should be borrowing then hit me up for a chat today 0430227328 – as you can tell I am pretty passionate about this.