Mortgage: How much can you afford to borrow?

Buying a home is one of the biggest investments you'll ever make. When deciding how much you can afford to borrow for a mortgage, keep in mind these points...

Budget for repayments

Before applying for a mortgage, prepare a budget to determine how much you can afford to repay each month. Consider your spending habits and also factor in any major expenses that you have - for example, repaying a car loan. Knowing exactly how much you spend each week is crucial in determining how much you can afford to pay on a mortgage. The general rule is that repayments should not be more than 35 per cent of your income.

Deposit

The amount of savings you use as a deposit is also very important. A good rule of thumb is to make a deposit of around 10% of the cost of the property. If you want to avoid Lender Mortgage Insurance, you will need at least 20%.

Financial commitments

This includes any credit card or larger debts you may have. It is advisable to pay off your smaller debts before taking out a mortgage and also keeping longer term debts to a minimum.

Your lifestyle

For most people, taking out a mortgage will mean certain lifestyle changes. Think about what you are prepared to sacrifice and what sort of lifestyle you could realistically afford once you have a home loan. Owning a home is probably not worth sacrificing your social life for!

Interest rate changes

Be prepared for possible rate changes over the term of your loan when deciding how much you can afford to borrow.