Don't let your mortgage limit your life

The dream of owning a home can quickly become a nightmare if your new house sucks up your entire income, leaving little left over for a comfortable lifestyle.

That nightmare is even more real for thousands of first home buyers, with mortgage stress becoming an increasingly common problem. A study of 26,000 households conducted last year by research company, Digital Finance Analytics, found that 16 percent of first home buyers in Australia were under mortgage stress. More troubling, was that the study predicts the number of households under mortgage stress will rise.

To avoid mortgage stress – and maintain your pre-mortgage lifestyle – the key is to ensure you don’t overextend yourself with a huge loan, said financial adviser Greg Pride of Centric wealth.

RateCity data shows that the majority of lenders require at least 5 percent deposit to qualify for a home loan. But there are around 100 home loans available that require less deposit than that to qualify, including one no-deposit loan.

“Over-extending yourself is a surefire way to a pretty miserable existence,” said Pride.

He recommends assigning no more than 30 percent of your take-home pay to the home loan. “Above that, things start to compromise and you have to decide whether you want to miss out on your weekly night out or holidays.”

According to this rule, if a household’s income is $10,000 per month, the monthly home loan repayments should not exceed $3000. A good idea may be to compare home loans and use an online mortgage calculator to determine what you’ll be up for in repayments before you talk to your lender.

Financial adviser with Integra Financial Services, Deborah Kent, agrees that the only way to prevent your mortgage limiting your lifestyle is to avoid over-extending.

She advises would-be borrowers to budget for higher repayments, should interest rates rise.

“Work out if you can survive if the interest rate rises to 8 percent,” she said. “Preparation is very much the key to avoid running into financial problems later on.”

“Especially when interest rates are low and people are tempted to borrow more. But ask yourself, ‘do I really need the $1 million house or can I spend $800,000 and upgrade later?”

No matter how much you borrow, though, you will have to adjust your lifestyle, Kent said.

“You will have to make some sacrifices,” she said. “You may have to cut down from going out four times a week to twice a week. A good solution is to entertain at home – it’s a great way to catch up with people without spending a lot of money, and you get to show off your new home.”

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