Knowing what you can afford to borrow

11 Feb Knowing what you can afford to borrow

If you’re planning to buy your first home or move to a new home, you should first know how much you can comfortably afford to borrow. You need to answer this question before you begin examining the different mortgage products available.

As a basic rule, lenders will let you borrow an amount so your monthly payments don’t exceed 30% of your pre-tax income.

Lending institutions prefer borrowers to have saved 20% of the purchase price as a deposit. They will lend up to 95% of the value of the home – usually subject to mortgage insurance. In some cases they may even provide 100% of the loan if the borrower can demonstrate a capacity to service the debt. Still, most financial advisers say that the larger the deposit, the better.

Be careful of schemes presented as a means to break free of the rent cycle and own your own home. These offers may sound enticing – but take time to evaluate the details.

Some arrangements involve purchasing a home with no deposit or borrowing more than the home’s value. Remember, purchasing a home with no deposit means paying interest on the full purchase price. Other offers include the lending institution putting up 90% of the purchase amount and a budding organisation lending the balance at a relatively higher interest rate. Always check purchase agreements and compare all interest rates and charges. It could be less expensive to continue renting while you save a sizeable deposit than to pay high interest on the full amount for an extended period.

Also be aware that home prices can fluctuate. If you have only a small amount of equity in your home and prices fall, you could owe more than the home is worth.

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