Keen to become a homeowner but not sure you’ve got the savings and income to make it happen? Our guide to borrowing and mortgages can help you buy within your budget.  

As a first-home buyer, it can be pretty tough saving for a deposit. So when you’re getting a loan to make up the difference between your savings and the purchase price – plus all the other costs of buying a home – you’re under pressure to borrow as much as lenders will allow. While moving into a place of your own can bring you happiness and security, taking on too much debt could seriously limit your future choices and lifestyle. So it’s important to take on a mortgage, and repayments, you can realistically afford, now and into the future.  

Lending criteria

There are no hard and fast rules for how each lender will assess your borrowing capacity. Although mortgage providers are subject to regulatory restrictions on making loans, each will have slightly different criteria for assessing your application and your personal and financial circumstances.

What you can be sure of is the amount of information you’ll need to provide. Lenders expect clear and comprehensive information about your income, assets, existing loans, expenses, credit rating and any dependants. So be ready to dedicate time to collating all this information and getting to grips with how your overall financial position may affect your borrowing capacity.

As a general rule, lenders will be prepared to lend you up to 80% of the value of a property, providing they’re satisfied you can afford repayments, based on regulatory requirements and their own lending criteria. If you’re prepared to pay Lenders’ Mortgage Insurance (LMI), then you may be able to borrow a greater proportion of the purchase price for your home. This is a one-off premium to protect the lender if you default on your repayments and they experience losses as a result.

Your home buying budget

Even though financial providers are under strict scrutiny from regulators to act responsibly in their lending practices, it’s important to know you’re taking on a loan you can comfortably afford to repay. How much you’ll be able to borrow from a bank or lender can sometimes be more than you can actually manage based on your household budget. “There has to be a surplus in your cash flow to cover repayments for the life of the loan,” says CFP® Sandy Hopps from Strategic Planners. “People often underestimate just how much they actually spend from month to month so I’ll always do a proper audit of client’s accounts to understand their real cash flow and budget position.”

ASIC’s MoneySmart website provides a comprehensive mortgage calculator tool so you can see how much repayments will be on your target loan amount. The tool includes a reverse option for putting in repayments you would find affordable and calculating what you could borrow based on that amount. If you’ve done the sums for your household budget as Sandy suggests, this can be a better approach to making sure you’re not getting carried away with trying to arrange a loan that will lead to mortgage stress. It’s widely thought that paying more than 30% of your income towards your home loan puts you in this ‘mortgage stress’ category. This could be a guideline to bear in mind when thinking about a reasonable amount of your budget to put towards mortgage repayments.

Plan for the extras

Becoming a homeowner is exciting but you’re also taking responsibility for a very expensive asset that needs to be maintained to keep its value. As you run the numbers for your current budget, don’t forget that future expenses could include large sums for repairs and improvements to make the most of your home, as a place to live and an asset.

There’s also the possibility that interest rates will rise in the future, with a knock-on effect on your home loan repayments. “If you can afford repayments now, interest rates – just like property values – can change,” says Sandy. “Interest rates in Australia have been low for a long time now and can only go in one direction from here. Any borrower needs to ask themselves what sort of impact it will have on their finances if interest rates – and repayments – rise.”

Deposit and mortgage all locked in and ready to go? Discover what’s involved in buying your first home in our step-by-step guide to take you from making an offer to moving in