How much you CAN borrow v’s how much you SHOULD borrow
So you’re in love ? Don’t fight it, there it is right before your very eyes – THE HOME OF YOUR DREAMS !
Sure it’s more than you had wanted to spend, but it’s the ONE.
Can you hear that voice ? Telling you “you work hard, you deserve a house like this”, right ?
Well maybe you do work hard, and I have no doubt you deserve to live in an awesome home, but if you don’t want that dream home to turn into your financial nightmare, then read on.
The Power of Backward Maths
Whenever I set a goal or intention to achieve something, financial or not I like to work backwards from the end point. This breaks down what I have to do in order to reach my goal. This strategy absolutely works for borrowing as well.
I’ve heard this referred to as ‘knowing your numbers’ which is another great description.
To break it down, here’s what I do:
- Work out exactly how much you need to contribute to buying your dream home. This should include stamp duties, solicitors/conveyancing fees, bank fees and building and pest inspections to start. Of course, your deposit for the purchase is counted in this figure as well*
- From here you’ll be able to calculate the shortfall between what you’ve got and what the cost is. In most cases this is made up of a loan/mortgage. Remember if you are borrowing over 80% of the properties value you’ll need to budget for Lenders Mortgage Insurance as well**
- So now you have an approximate loan amount, you’ll need to work out what the repayments on this amount are.
WARNING: this should not be factored on the cheapest rate you can find and not on interest only repayments
Why ? Contingency, thats why. Rates change, Interest Only periods expire and if this truly is THE home for you, the mortgage is a long term commitment. It will exist through more than one economic cycle. If you do get a really cheap rate, then your surplus repayments can be used to pay off your loan sooner or you could look at the benefits of using an offset account or redraw.
4. Do a realistic budget. If you’re a first timer with this, it can be a real eye opener. You can use a basic Excel spreadsheet or check out some of the great budget apps that are available. You’ll need to track all your existing payments and income.
My definition of realistic – this is not a short term loan, you will need to consider what other life events you are planning that will occur within the time frame of this mortgage. EG, job change, starting a business, expanding your family, carer responsibilities, going solo, big OS trip, etc etc and how that might factor in or affect your living costs.
Here’s where the backward part comes in. The amount you can afford comfortably in your new budget for loan repayments should equate to the loan amount you are looking for. If it’s higher or equal to the loan repayment on your Dream Home = Happy Days !. If it’s lower than = Plan B.
So if you’re not quite ready for that level of Dream Home, what do you do ? Here’s just a few options:
- Increase your deposit/contribution amount. If you were considering a higher repayment, how about ‘practising’ by putting the difference aside between your current living costs and the higher loan repayment.
- If you do have other assets, what is the impact of liquidating those to add to your contribution ?
Lastly, you can always look at a compromise property. Something that is a step up, but with a lower price tag, maybe a further 5 kms out or a smaller block. You can always take an extra step on the property ladder before you get to the dream home. And, if you do it without regrets, it will be all the more enjoyable when you get there.
*Mortgage brokers are awesome at Backward Maths and we can sometimes consider factors you might not have
I know it goes without saying, but all lending is subject to credit criteria and this advice is general in nature only.
Samantha is the Director of Thrive Investment Finance. She started Thrive to share her specialist expertise and passion for finance. She works with everyday people – mums and dads, small business owners, health workers, administrators, tradies, teachers – people like you and me. People with no specialist expertise in finance who want to create a secure future without missing out on life today.
Contact Thrive (07) 3103 1450