How much can you afford to borrow?

Buying a house you can’t afford can be a bit like parking downhill and leaving the handbrake off – not very smart and bound to end in disaster.

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So make sure you go in with your eyes open by being clear about your finances from the start.

You can usually get a ballpark indication from financial institutions on how much they’ll consider lending you based on your deposit, your income, your debts and what you’re thinking of buying.

This isn’t a sealed deal, though – you’ll need to provide details of your salary or wage, your KiwiSaver savings, the value of any other assets you own, and details of anything you owe (including hire purchases and credit card limits) etc.

Most of this is a formula that lenders use to protect them from you defaulting on the mortgage, so take heed of what they say you can afford.

Once you’ve found a property you like you’ll then need to go back with details of the property’s details, its valuation, how much you want to offer and what your deposit will be, to apply formally for a home loan.

Working out your loan repayments

Work out how much your home loan repayments might be. Do some sums on Westpac’s Mortgage Repayment Calculator with some sample purchase prices (less your deposit) and different terms.

This calculates your likely fortnightly or monthly repayment costs.

Compare this with what you’re paying in rent at the moment, and work out whether you could cover any shortfall by getting flatmates or giving up a daily coffee, a weekend brunch or a weekly night on the town.

See how much interest you could save and how quickly you could pay off your loan by entering a higher repayment figure. A home-made lunch each day could work out to thousands of dollars in interest you’ll save down the track.

Some other things to consider:

  • Interest rates change daily, so unless you lock in a fixed rate you’ll need to be prepared to pay more if rates go up.
  • Will you need to renovate straight away? Or can any changes wait until you’ve saved up for them?
  • What extra costs could you face (or save), like transport?

You might be better off sacrificing a few ‘dream property’ features or looking at suburbs with lower-value properties to ensure you’re not stretching your repayments too tightly.

This sounds like your mother, but better to go a bit lower than you can afford and have a bit of padding, then extend and risk being in financial do-dah down the track.

This information is not intended as a complete guide, as it doesn’t consider your individual needs or financial situation. Trade Me accepts no responsibility or liability for any inaccuracies or omissions in the content. Always obtain independent legal advice before buying or selling property.