Buying a home is exciting. It’s one of the biggest purchases most of us will make in our lifetime, and we all want the nicest home possible. However, you may be considering how much you should actually borrow, not just how much you can borrow. Should you borrow to your maximum capacity or borrow less?
This is a judgment call that you will need to make personally, however we’ve outlined a few key points to consider below.
Associated costs of home ownership
Home ownership comes with a range of associated costs, which increase according to the size of property you have purchased. These factors can impact the ongoing costs of home ownership beyond your principle and interest payments.
For instance, these may include:
- Council rates and property taxes
- Heating and/or cooling
- Furnishing your new home
- Maintenance and repairs
- Insurance costs
Consider asking: “I might be able to afford higher mortgage payments, but can I also afford all of the other increased costs that come along with that?”
There’s no shame in answering “no” to that question; often, these other expenses can add more to your monthly cost of living than the larger mortgage itself.
Long-term interest rate changes
With mortgage rates currently sitting below 3% per annum according to MoneySmart, it is unclear whether interest rates are going to rise. Should interest rates increase, you may find that the increase in your mortgage repayments may be to an uncomfortable level.
Currently the debate is open regarding whether interest rates in Australia will increase, and during which time frame. Regardless, ensuring enough margin should interest rates increase may be a consideration when determining the amount you borrow.
Changes to personal circumstances
While expenses may increase, you may also consider the risk changes of your personal circumstances. Do you have sufficient savings in place for emergencies?
A change in employment or temporary unemployment could strain your monthly finances without adequate savings. However, this may also be impacted by external commitments, such as caring for a family member.
Sometimes more is better
Even if you have savings in the bank, sometimes borrowing more money to purchase your property can make sense. By borrowing more to pay for purchase costs and stamp duty, you can leave your savings in your account to offset the interest on your loan, use toward a home renovation, or anything else you see fit.
Ultimately, everyone’s financial situation is different, so the decision on how much to borrow for your mortgage is your own. If you are looking for personalised advice, be sure to contact a financial advisor or mortgage broker to understand your particular borrowing profile and what you may comfortably afford.