What you can borrow or what you should borrow?

The amount you can borrow and the amount you should borrow are sometimes two very different
things. Before you apply for a home loan, it makes sense to realistically assess your financial
situation. Here’s how to do it.

Understand your borrowing capacity
Generally speaking, your 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, or principal and interest loan
the term of the loan, estimated repayments.
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However, knowing the difference between what you can borrow and what you should borrow is
very important. As a general rule, 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.
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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.

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Future-proof your figures
Remember to leave a bit of wiggle 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.
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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, a mortgage broker may be helpful during the decision-making process.