How To Decide How Much To Borrow

You’ve decided to buy a home – that’s huge! When you begin exploring home loans, one of the first things lenders will dive into is how much they feel comfy lending you. They calculate this by number crunching your income, your expenses and your spending habits to establish how much money you’ve got available to make repayments. Their super-wizz-bang-magic computers will take all this into consideration and spit out an amount they’re happy to lend.

But we’ll let you in on a little secret – just because you can borrow a certain amount, doesn’t mean you should. Here’s a few ways you might go about deciding how much YOU feel comfortable borrowing.

Remember, any advice provided on this website is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should consider whether it is appropriate for your situation.

Think ahead about your income

Nobody can predict the future. Not you, not a lender, and definitely not a crypto bro spruiking meme coins on social media. But exploring what your potential future income could be is important when deciding how much to borrow.

You need to be comfortable repaying your home loan over the long term, so if your income is likely to drop or stop, you might need to take it easy. Increasing income over time will make it easier to pay off your loan, but stagnant or even decreasing incomes can pump up the pressure on your repayments.

This is particularly important to be aware of if your income fluctuates, for example if you’re a freelancer, gig economy worker or casual employee. But income can decrease for many reasons, including redundancy or loss of clients from volatile jobs or industries, taking time out of the workforce for parental leave, career changes, economic ups and downs, sickness or even injuries. Consider how you’d repay your home loan if your income were to take a hit – the less stretched you are, the better.

Explore other protections

Before you gouge your eyes out and declare yourself out of the home buying game, don’t panic. There are ways to protect yourself against life’s ups and downs. Mortgage insurance can protect you against periods of financial distress and pay your mortgage repayments if you’re unable to.

Income protection insurance can replace your income (or at least a percentage of it) if you find yourself out of work, too. Worth thinking about.

Crunch the numbers on what you want in life

Lenders are only able to look at your expenses in real time, right now, and that means your borrowing capacity is based on the here and now, too. If you’re planning to get married, have a child, study landforms in rural Utah, or start collecting dinosaur shaped teapots – hey, you do you – consider how that’ll change your financial situation. Spending too much of your spare income on home loan repayments can limit your ability to spend on other things down the line.

Beware of rate shock

Interest rates went down swinging for the last decade, which made it hard to imagine paying more than a handful of per cent in interest on your home loan. However, rates are now on the rise, which means we need to be prepared. When rates go up, so do your interest repayments. If you’re stretching to repay a home loan at 3%, it could be really tough to repay it if rates jump to 5% or more. We’re not saying that’s what will happen: like we said, not even people who work at banks can predict the future. But we are saying, it’s worth thinking about how you’d manage if things get harder.

The good news is, lenders get this. They do factor it into their assessments by calculating your repayment abilities as if rates were higher than they actually are. Fun fact, the rate they base this on is known as a ‘serviceability rate’. But, it still pays to do your own calculations and work out how comfortable you’d be repaying at a higher rate. Luckily, as an Upsider you’ve already got bonza visibility over where your money goes, so get number crunching to see what you’re working with if rates start soaring.

Consider the longevity of the home you’re buying

The first home you buy might be rosé-on-the-balcony marble-benchtop-perfect for your lifestyle right now, but how long will it fit the bill for? If you’re going to need to upsize in the near future, take that into consideration. If you’ve already borrowed your absolute maximum capacity, you could find it harder to scale up.

Something else to consider is how the value of the home you’re buying is likely to change over time. That’s impossible to totally predict (yes, we know, we keep saying that) but you can look at patterns over time, and make your own best guess, as to how different types of property and different places are likely to grow or not. That bargain basement apartment in a town where the biggest employer just shut up shop may actually not be a bargain, if you can’t get work and you can’t sell it on. It may be worth paying a little more for a fixer upper in a sunnier spot.

Put your repayments in context

A lender’s super-wizz-bang-magic computer might say you can borrow $750,000, but what would that do to your lifestyle? To help you decide how much you’re comfortable borrowing, explore what your disposable income would be at different borrowing levels.

What would you be left with if you took on the full $750,000 loan? If you're looking to buy an inner city pad close to all the action, you’ll want to actually be able to enjoy it – will you have enough to go see some art and check out the new pasta bar that just opened right next door? If you’re maxed out financially, you could miss out on the lifestyle you’re buying into.

Plug different numbers into a few lenders’ repayment calculators and how much you’d have left over if you took on a smaller loan. Then, weigh up how much lifestyle you’re willing to trade for more home. It’s a balancing act, but getting it right will make your first home all the more worth it. Let's make your loan a regret‑free-zone!