How much can I borrow vs how much should I borrow?

Some lenders will lend you more than you can afford and some will lend less than you can afford so it is important to work out for yourself how much you should borrow based on your own individual circumstances.

The key to this is to look at your personal cash flow.  How much are you saving now and how much do you want to be saving after you take out the loan?

Here are the steps involved:

  1. Establish what spare cash you are saving each year now.
  2. Establish how much cash you want to be saving each year after purchasing a property.
  3. Work out the difference between these two numbers.
  4. Then subtract any new expenses and add back any that will stop:
  • Subtract - Council Rates
  • Subtract - House Insurance
  • Subtract - Home maintenance & repairs
  • Add + Rent you no longer need to pay if this is your home
  • Add + Rent you will receive if this is an investment property
  • Add + Interest on any loans or credit cards being paid out
  1. The result is what the maximum repayments on your home loan should be each year.
  2. This number is the amount you can afford to pay towards your loan each year and still maintain your savings target.
  3. This maximum repayment figure can be used to work out your maximum loan size.
  4. It is also worth checking what your cash flow looks like if interest rates go up 2%
  5. If you are not comfortable with what your cash flow looks like with interest rates 2% higher you may want to reduce the maximum loan amount even further.

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