Just because you can afford to buy something, does that mean you should?
It’s a question we frequently need to ask ourselves and it’s a particularly important one to consider when it comes to borrowing money to purchase property either as a residence or an investment!.
Just because you have been approved for a loan does that mean you should borrow the full amount?
Once your financial commitments have been assessed by your lender or finance professional, they will tell you how much you can borrow – your ‘borrowing capacity’ – but it’s important to evaluate this amount carefully.
It’s not the straightforward guide that it might look like.
While a lender may be willing to lend you one amount, it’s important to consider carefully how large a mortgage you can personally manage.
It may actually be less than your borrowing capacity.
With interest rates and assessment rates currently decreasing, the cost of borrowing has become more affordable but, the financial environment changes constantly and what you can afford today might not be what you can afford tomorrow.
It’s also wise when assessing your capacity to borrow, to include a buffer for interest rate increases of a percentage point or two – because things never stay the same!
‘Mortgage stress’ is commonly defined as the need to spend more than 30% of your monthly income on home loan repayments.
This may well put extra strain on your income and lifestyle.
While this figure may be a useful guide, it will not necessarily mean the same to every income level and every home buyer or investor.
Instead, you need to think about your own readiness to take on debt and, what level of debt might be too stressful for you.
When considering how much debt you want to take on, you may also need to take a look at your lifestyle and how willing or able you are to make adjustments to the way you live.
If you’re happy to curb your spending you may be able to manage a larger debt but, if overseas holidays and dining out are high on your agenda, you may need to compromise on your property price tag to maintain your preferred lifestyle.
A good lender or mortgage professional can help you take a pragmatic look at your personal situation and inform you of your options and possible outcomes, to help you arrive at the best solution/s to your requirements and financial needs.