How much should you borrow for a mortgage?

Being aware of your own financial situation can help you make an informed decision when you decide how much you should borrow for your home loan. Before applying for a mortgage, you should try to estimate your borrowing capacity, as this can help you budget and plan for the repayments.

What is your borrowing capacity?

Borrowing capacity means the total amount of money that you can borrow from a bank or a lender. Your borrowing capacity will be based on your individual financial circumstances, so it will be different for different individuals. Your borrowing capacity may also vary from lender to lender.

Your maximum mortgage borrowing amount will be decided by your borrowing capacity. The lowest amount you can borrow is subjective and varies from one lender or financial institution to another. There is no fixed minimum mortgage borrowing amount as such. 

How do lenders figure out your borrowing capacity?

To calculate your borrowing capacity, lenders will consider your monthly income as well as your monthly expenses, including other loan repayments, insurance premiums and credit card payments. Your credit rating may also be considered while working out your borrowing capacity. 

Additionally, a lender's mortgage interest rates can affect your borrowing capacity. For example, if their interest rates are low, you're more likely to be able to afford the repayments, so your borrowing capacity may be higher. 

How much should you borrow for a mortgage?

Just because you have a higher borrowing capacity does not mean that you have to take on the maximum loan amount. You may want to figure out how much you can borrow before it starts affecting your lifestyle. A common benchmark is that if more than one third of your income is going towards servicing your mortgage repayments, you may be at risk of mortgage stress. 

If you can afford to pay a bigger deposit upfront, you may be able to take out a smaller loan and save on interest charges. Choosing a shorter loan term may also help you pay less interest on the mortgage in total, though the monthly repayments may be higher. 

You need to plan your finances carefully and be certain about your ability to repay before you commit to a long term home loan. By reviewing your income and expenses for the past six months, you can get a rough idea of where you need to cut down on your expenses. 

What to consider before taking out a home loan

Are the mortgage repayments affordable?

To estimate if your mortgage repayments will be affordable, draw up a monthly budget, include the proposed repayment amount in the list of expenses, and see if you can easily afford the amount with your and your partner’s income. 

What are some upcoming major life changes?

While creating a budget to check the affordability of the mortgage, you should factor in any upcoming major life changes that may affect you. For example, if you're planning to have a child in the future, there will be extra expenses to add to your budget. While there is no perfect way to predict what is going to happen in the future, you may want to keep a contingency fund available for emergencies. 

How disciplined are you?

Remember that you'll need to be consistent with your repayment schedule. You also have the option to put any windfalls or inheritances towards your mortgage as extra repayments, which could help you pay off the property sooner and save money on interest charges. 

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