The amount you can borrow versus what you should borrow

Understanding your borrowing capacity is a key element in taking out a loan. And the amount you can borrow and the amount you should borrow are sometimes two very different things. Here we look at some of the basics to consider before you apply for a home loan.

Understanding your borrowing capacity

Generally speaking, borrowing capacity – what you can borrow – depends on a number of factors, including:

• your income
• your monthly expenses
• your existing debts
• how much deposit you have saved
• current interest rate
• type of loan
• whether it’s a principal and interest or interest only loan
• the term of the loan
• estimated repayments.

However, knowing the difference between what you can borrow and what you should borrow is very important. As a general rule of thumb, it’s not a good idea to allocate more than 30% of your monthly household income to repaying your home loan.

Build a budget

To fully understand what your realistic borrowing limit might be, first of all create a budget – and stick to it. Once you understand exactly what’s coming in and going out you can properly assess how much you can afford to repay – and therefore what you should borrow.

If you don’t feel comfortable drawing up the budget yourself, it’s wise to seek help. A financial planner can assist you in preparing a budget.

Expenses to include in your budget include, but are not limited to:

• council rates
• body corporate fees (if applicable)
• insurance costs
• maintenance costs
• utility bills
• estimated groceries
• medical bills and health fund payments
• school fees
• phone and internet costs
• petrol and transport payments
• entertainment, travel and clothing
• other loans or credit card debts.

Future-proof your figures

Remember to leave room in your budget in case circumstances change. People can lose their jobs or get sick, or interest rates can rise, which could impact your ability to honour your repayments.

It’s also important to think about some other things that may happen: Is your income likely to increase within the next few years? Are you likely to have children and lose an income? Do you plan to retire shortly? These are all questions that only you can answer, and they will all have an impact on how much you should borrow.

Remember, lenders tell you how much you can borrow, but you know your personal circumstances better than anyone else – it’s up to you to decide how much you should borrow.

If you need support and advice, Equilibria Finance can support you through this decision-making process.

Anthony Landahl | Equilibria Finance

Note: This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article. Please ensure your personal circumstances are taken into consideration.