How to beat debt by borrowing within your means

Entering the Australian property market is no easy feat, and at times it might be tempting to increase your budget in order to place a winning bid or offer – but this can be problematic for your finances.

For most, a mortgage will be the biggest debt you take on in your lifetime. And with home loan terms typically spanning 25 to 30 years, it can impact your financial situation for a significant portion of your adult life. This is why it’s so important to carefully consider the size of your home loan before you get started on the application process.

It’s unlikely your current lifestyle and financial circumstances will remain the same for the entire duration of your loan term. So, in order to prepare for the future and ensure you’re borrowing within your means, consider the following scenarios that could affect your household budget over time:

• Interest rate hikes – Interest rates tend to fluctuate over time, so if your mortgage repayments are already at the top end of what you can afford, an interest rate hike could push you over.
• Expiration of a fixed rate – Even if you’re locked into a fixed rate home loan, you’ll still need to prepare for when your fixed term ends. If rates are rising, it’s almost certain banks will have raised their fixed rates too. Which means refinancing to another fixed rate won’t necessarily be a solution either.
• Change in income – Whether you’re faced with redundancy or forced to take time off due to illness or injury, a change in income could have a substantial impact on your budget.
• Having a baby – Welcoming a new addition to your family can come with significant expenses, not to mention accounting for time out of the workforce to care for them.
• Taking on other debt – There may come a time when you want to take out a loan to upgrade your car, renovate your home, or for a number of other reasons. Doing so may put more pressure on your budget, as your monthly liabilities will increase. Especially if you are repaying a large mortgage.

Of course, it’s virtually impossible to predict every change that may come your way, but factoring in the ones that you can foresee may work in your favour.

How can you ensure you’re borrowing within your means?

Taking out a home loan with repayments that could stretch your budget beyond what is comfortable has the potential to put you under mortgage stress. In order to avoid this, you’ll need to understand how much you can comfortably afford to borrow.

You might find RateCity’s borrowing power calculator helpful to determine how much you may be approved to borrow. It requires you to enter some basic information, such as:

• whether you’re applying by yourself or with a partner;
• whether you plan to live in the property or rent it out;
• whether you have any dependents;
• what your earnings are (and your partner’s, if applicable), and;
• what your expenses are.

The calculator will use this information to determine how much you may be able to comfortably afford to borrow, factoring in a higher interest rate than the current average to account for rate fluctuations.

The more information you provide – such as choosing to include your existing liabilities – the more accurate the calculation may be. But remember, lenders will use their own calculation methods to determine how much they are willing to lend you.

If you find that you may only be eligible for a loan that’s lower than what you would like, it may be a good opportunity to reassess your budget. Consider paying off existing debts and/or cutting down on unnecessary monthly expenses before you get started on your home buying journey.

And if you’re looking for personalised advice and guidance from an industry professional, consider reaching out to a mortgage broker.

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