Working out your borrowing capacity

As real estate prices across the country continue to soar while home ownership rates remain in decline it can be a real challenge for those wanting to get on – or move up – the property ladder.

With only 31 percent of Australians* now owning their own home outright, it’s important for anyone looking to buy a property to understand how much they can comfortably afford to borrow.

Credit Union SA CEO Grant Strawbridge shares his thoughts:

1. Strike a balance

Home ownership shouldn’t come at the cost of giving up all the fun things in life, so it is important to strike a balance between lifestyle expenses and your repayments. While it might be hard to live on a budget, make sure to factor in living expenses like utilities, food, travel, gym memberships and entertainment, and use this as an opportunity to cut back on any unnecessary expenses.

2. Create a “future home” budget

Most people with a mortgage will tell you that home ownership can bring a myriad of hidden – and sometimes unexpected – costs, so planning ahead is invaluable. Imagine yourself in your future home and create a budget based on that. Be sure to include all the costs like council rates, emergency services levy, utilities, and everyday expenses like groceries and transport. Any money left over from your ‘future home’ budget will give you an idea of what you can afford to spend on repayments.

3. Rent can help

If you are already renting then your ‘future home’ budget is easier to work out, simply look at your expenses and see how much extra you would be comfortable spending on rent each week. If you have spare cash in hand after rent and other bills are paid then that can help guide how much of a mortgage you could accommodate, but don’t forget that you are also likely to need a deposit and history of savings to get a loan application over the line.

4. Have some wriggle room

The Reserve Bank’s decision to maintain official interest rates at record low levels for more than a year is great news for home buyers, but it is important to remember that rates are always subject to change, which could mean mortgage repayments can start to go up. That is why it is important to work out how much you can comfortably cover as repayments now and into the future.

5. Build a buffer

Choose a loan that allows you to make extra repayments but offers the flexibility to re-draw on them if you need to later. Making more than the minimum mortgage repayment is a great way to build a security buffer while saving some serious interest over the life of a loan. Weekly or fortnightly payments are another way to drive down a mortgage without much hip-pocket pain.

*2016 ABS Census