Applying for a home loan to purchase a property almost always comes with the question of how much should be borrowed. It is important to know that although a bank is willing to lend you an amount of money, it may not necessarily be within your best interest to take on that amount. In the eyes of a first-time buyer, borrowing a large amount of debt may be required to break into a competitive market, but does that mean it’s the right approach.
Over the last 12 months, buyers have had to endure a rollercoaster ride of emotions with continuous lockdown laws and rising property prices. To combat the economic challenges brought on by Covid-19, The Reserve Bank of Australia (RBA) has been relatively steady with the cash rate over an extended period of time. This has enabled and provided a great opportunity for many borrowers to access very cheap finance to secure a property. To add to the excellent borrowing conditions, the Australian Prudential Regulation Authority (APRA) softened the serviceability standards when assessing an applicant’s capacity to make repayments. This means that buyers have a larger borrowing capacity to fund a purchase compared to a few years back. Although serviceability has increased for borrowers, caution still needs to be practiced when choosing how much and what to invest in.
To prevent mortgage stress is recommended that mortgage repayments are around 30% of total household income. Due to the rapid rise of housing prices and competition, many buyers have turned to borrowing more in order to break into the market. If you have very few other debts (credit cards, personal loan, car loan, HECS) then justifying going to 35% is possible, but much further than that and you place yourself at risk of not maintaining your repayments.
When deciding about purchasing a house, buyers shouldn’t jump at a perceived bargain or feel rushed. In a competitive market and social pressures on numerous fronts, buyers need to critically analyse their financial situation, goals and future outlook when taking on debt. A house secured from a high level of debt in a falling market can quickly turn sour, especially those that have leveraged themselves to a high point. On the other hand, borrowing high levels of debt when the value of a property is increasing and paying off the loan can strengthen your financial position. This is when borrowing big makes the most sense…. But how confident are you of picking the market?
Awareness and sound judgement of position
Buyers need to be aware of their budget and stick to a plan that works for their given situation. Taking into consideration all lifestyle variables, potential future changes and aspects that may affect your cash flow is important when thinking about how much debt to take on. For any debt you need to be absolutely certain that your loan repayments can be met in addition to all of your other expenses.
If you are looking to understand more about borrowing debt and the costs involved then contact the team at 40 Forty Finance to undergo an assessment.