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Tips For Deciding How Much To Borrow with a Mortgage
How much to borrow for a house is a crucial question if you do not want to end up in an overwhelming amount of debt. From the perspective of first-time homebuyers, the question is usually how much they can afford to borrow, instead of how much they should borrow.
However, it is imperative to keep in mind that the maximum amount a financial institution is willing to give you isn’t necessarily the amount that you should borrow. These institutions have complex means of deciding the maximum amount that you can borrow. They consider all your assets and liabilities, the median spending habits for individuals in similar scenarios and put interest rate buffers in place to make sure you can still afford your mortgage if the rates happen to rise.
So, How Do Financial Institutions Decide How Much You CAN Borrow?
Banks decide how much money you can borrow for a house purchase based on serviceability calculations. These take into account your total income and expenses. They ideally look at the proposed debt as a part of your monthly income.
When calculating the expenses, the approach varies depending on the bank. While some consider your actual income and expenditures per month, some will decide the maximum amount of additional debt they think you can pay. They will also consider the kind of property you plan on purchasing as well as the size of the deposit you have in place.
So, How SHOULD You Decide How Much To Borrow?
As mentioned above, what the bank will give you may differ from the amount you think you can repay comfortably. In some situations, the banks estimate may be on the low side, while in others, they may give you more credit than you feel comfortable taking.
Before deciding how much you should borrow for your new home purchase, here are a few questions to ask yourself:
What Type of Lifestyle Do You Want?
Taking a mortgage means you will have to make several alterations to your lifestyle. Home ownership comes with many benefits, but it can ideally mean some alterations that may not be so welcoming.
Deciding to take a mortgage means making sacrifices in other spending areas. If you are used to spending on takeaways, going out every weekend and purchasing anything that interests you, keep in mind that you may have to substantially adjust your lifestyle when you start making mortgage payments. How significantly, will obviously depend on how much you borrow.
Before deciding on the amount to borrow, take a look at your current monthly expenses and calculate the average. Assess what sacrifices you are willing to make in order to make mortgage payments.
How Disciplined are You?
Once you’ve decided on the type of lifestyle that you are comfortable with, the next thing is to assess whether you have the discipline to stick to the new lifestyle ahead. Here, you will have to do an honest look at your financial discipline before settling for a mortgage. It takes a good amount of discipline to service any mortgage, but a debt that significantly increases your expenditures will call for ultimate financial discipline.
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While it is imperative to create a budget based on the living standard you would like to have, sticking to the budget will be the hardest part. If you have a budget and discover that you have the tendency to overspend, you’ll want to factor this into your evaluation when deciding how much to borrow. If you don’t have an ideal financial discipline, you’ll want to leave some leeway in your mortgage payments.
What Additional Costs Will You Face?
The expense of a house does not end with a mortgage. Before you move in, you will ideally need to budget for an array of expenses that come with the house buying process. Chances are you’ll have to pay legal fees, stamp duty, building and pest inspections, and even house removal services.
There’s also the ongoing expenses related to homeownership. In addition to mortgage repayments, you will also have to factor in home insurance payments, utilities, upkeep, maintenance and council rates.
These costs can really add up and become a substantial monthly expense. As such, it is important to keep them in mind when deciding on the amount to borrow for a home loan.