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Can you afford a mortgage?
For many Australians, buying your own home is something you dream about (while indulging in a smashed avocado brunch), but is it an unobtainable dream?
While it may sometimes appear to be that way with today’s housing market, it’s not worth giving up! Calculating whether you can afford a mortgage is simpler than you think.
The easiest way to work out whether you can afford a mortgage is to calculate your home loan repayments. A general rule suggested by most lenders is to keep your mortgage payments at or below 30 per cent of your gross monthly income. Once you have established how much you can pay off each month, you will be able to determine a budget for the amount you can borrow for your home loan and the cost of a house you can afford to buy.
Saving a Deposit
To purchase a house, you will need to save a deposit, which could range from 5 per cent to 20 per cent of the price of the house or higher. Ideally, you will be able to budget and save 20 per cent as this will allow you to avoid the sting of lenders mortgage insurance (LMI).
If you calculate how much you can realistically save, and you are able to save 20 per cent or higher, you will present yourself as a reliable borrower to lenders. They will potentially offer you a home loan at a lower rate as your ability to save indicates that you are a lower risk than others on defaulting on the loan.
Lenders mortgage insurance (LMI) is a security cost which is required if you want to borrow more than 80% for a standard loan, meaning if you don’t have a 20% deposit saved you will be stung with insurance, which could end up costing you thousands.
By the end of 2016, the national average house price climbed to a record high of $780,877. This means that a 20 per cent deposit on an average house equates to $156,175, which is certainly a difficult goal for average Australians to achieve.
| Cities | Dec 2016 – Average House Price | 20 per cent Deposit Amount |
|---|---|---|
| Sydney | $1,123,991 | $224,798 |
| Melbourne | $795,447 | $159,089 |
| Brisbane | $540,758 | $108,151 |
| Adelaide | $501,166 | $100,233 |
| Perth | $573,766 | $114,753 |
| Canberra | $684,395 | $136,879 |
| Hobart | $382,888 | $76,577 |
| Darwin | $591,167 | $118,233 |
| National | $780,877 | $156,175 |
Source: Domain Rental & House Price Report December Quarter 2016.
If this is well out of your price range, you will still be able to afford a house by saving a smaller deposit and paying the security cost of LMI. This will all depend on the conditions of the lender and the home loan products they offer.
You can also present yourself as an ideal borrower by getting a guarantor. If you can’t quite save up a 20 per cent deposit, or if you have impaired credit history, having support from someone with equity (such as a relative) will put you in a more advantageous position and improve your case to prospective lenders.
Calculating monthly payments
To have a better understanding of your potential monthly mortgage repayments, RateCity suggests using our mortgage calculator. You will be able to input a variety of loan details and be presented with a list of lenders who are offering mortgages that might be right for you.
If you already have a home loan, you can use our home loan refinance calculator to determine how much you could pay monthly and potentially save over the lifetime of your loan by switching to a different product.
Researching Home Loans
Once you’ve worked out an amount you can realistically save for a deposit, and what your monthly home loan budget would be, the next step is to find a home loan.
There are a variety of products out there, and it can often feel impossible to narrow down the options. RateCity suggests using our home loan comparison tool to help you find the ideal home loan for your situation.
If you are still feeling overwhelmed by the sheer variety of home loan products out there, a mortgage broker could be invaluable to your home loan journey. They will research home loan products on your behalf based on your requirements and budget and present you with a range of different options.
Disclaimer
This article is over two years old, last updated on March 7, 2017. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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Product database updated 27 Nov, 2024
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