How much should you borrow for your home loan?

How much should you borrow for your home loan

When you’re applying for a home loan, the amount you’re eligible to borrow may be different than the amount you actually should borrow.

Banks have some sophisticated systems for deciding the maximum amount of money they will lend you. They take into account all your assets and liabilities, look at the median spending habits for people in similar situations and build in interest rate buffers to ensure that you can still afford your home loan should rates rise.

What banks can’t take into account is your particular personality. Only you know your own budgetary discipline. This means you need to take into account not just how much you can borrow, but how much you should borrow.

How banks decide what you can borrow

Lenders decide how much you can borrow based on serviceability calculations. These calculations take into account your income from various sources along with your expenses. Lenders then look at the proposed debt as a proportion of your monthly income and build in a buffer for potential interest rate rises.

How banks calculate serviceability

When calculating your expenses, lenders vary in their approach. While some look at your actual expenditure, others use models that estimate your expenses. They do this by looking at the median Australian household spend for basics such as food, utilities and transport, and then adding in a set amount for discretionary spending.

How banks calculate your expenses

Based upon the lender’s calculations of your monthly expenditure and your monthly income, lenders will decide the maximum amount of additional debt they believes you can service. In deciding on the size of the home loan to offer you, lenders will also take into account the type of property you’re buying and the size of the deposit you have.

How you should decide what you can borrow

What the bank will lend you may differ from the amount you feel you can comfortably repay. In some cases, a lender’s estimate may be on the low side, and you might be disappointed by the maximum amount available to you. In other cases, a lender may be willing to extend you more credit than you feel comfortable accepting.

Before you decide how much you should borrow, you need to ask yourself a few questions:

What kind of lifestyle do I want?

In all likelihood, taking on a home loan means you’ll have to make a few changes in your lifestyle. While home ownership comes with many positive lifestyle changes, it can also mean some changes that might not be so welcome.

Taking on the responsibility of a home loan could mean you’ll have to curtail your spending in other areas. If you’re used to going out, spending on takeaways or buying a lot of discretionary items, you may have to significantly adjust your lifestyle once you have home loan repayments to make. How significantly will depend on how much you borrow.

To get an idea of the amount a home loan will add to your monthly expenditure, you can use the repayment calculator below. You can look at various borrowing scenarios to see what your repayments will be if you borrow different amounts.

Before deciding on the amount you’re comfortable borrowing, have a look at your current average monthly expenditure. Once you’ve figured this out, honestly assess what sacrifices you’re willing to make to pay your home loan repayments.

Am I comfortable paying LMI?

One of the factors that will determine the amount lenders will offer you is the size of your deposit. Some lenders will approve home loans with as little as a 5% deposit, but if you choose to take this option, you’ll find yourself paying lenders mortgage insurance (LMI).

LMI is an insurance policy that covers your lender in the event you default on your home loan. It’s charged when you borrow more than 80% of the value of the property you’re buying. LMI can add thousands of dollars to the cost of a home loan and will end up increasing your home loan repayments.

If the added burden of paying LMI is too much, you might need to rethink the amount you want to borrow. If you can keep your loan-to-value ratio (LVR) below 80%, you can avoid having to pay this added expense.

How disciplined am I?

Once you’ve decided on the kind of lifestyle you’re comfortable with, you’ll have to assess whether you have the discipline to stick to your new lifestyle.

You’ll need to take an honest look at your own financial discipline before you decide to take on a home loan. It takes a fair amount of discipline to service any home loan, but a home loan debt that substantially increases your monthly expenditures will require a very disciplined approach.

While it’s important to work out a budget based upon the standard of living you’d like to have, sticking to this budget will be the difficult part. If you have a budget and find that you typically overspend, you need to factor this into your assessment when deciding how much to borrow. If financial discipline is difficult for you, leave yourself some leeway in your home loan repayments.

What life changes might be on the horizon?

A budget and an honest assessment of your discipline will give you a good idea of the home loan you can afford right now, but you’ll also want to prepare yourself for the future. Any life changes could impact your ability to repay your home loan. Although some life changes are unforeseeable, you can factor others into your financial plan right now.

If you plan on having children in the next few years, you’ll want to factor this added expense into your calculations. Likewise, if you’re looking at a career change in the medium term, think about the impact this could have on your income.

If you’re borrowing as a single person, you might want to consider the possibility that one day you’ll be repaying your home loan as a couple. Adding another person to the mix can help alleviate some of the financial burden, but keep in mind that you’ll also be adding that person’s debt and expenses to what you need to pay.

You might not be able to predict all of the life changes that could happen during the term of your home loan, but it’s wise to leave yourself some breathing room just in case.

What extra costs will I face?

The expense of a home doesn’t end with a home loan. Before you even move in, you’ll also need to budget for a variety of expenses involved in the home buying process. You’ll likely have to pay stamp duty, legal fees and fees for building and pest inspections. After the home loan settlement, you’ll also have to pay for removalists to help you move into your new home.

There are also ongoing expenses associated with homeownership. In addition to your home loan repayments, you’ll have to factor in home and contents insurance payments, council rates, utilities, maintenance and upkeep. Depending on the type of property you move into, you may also have strata or body corporate fees.

These costs add up and can be a significant monthly expense. When deciding on how much you should borrow, you should keep these ongoing expenses in mind along with your home loan repayment.

Hidden costs of homeownership

Lenders are fairly conservative in their assessment of what you can afford. It doesn’t behove them to lend money that borrowers are unable to repay. But as conservative as they might be, they can’t factor in some of your unique personal circumstances. By taking the time to assess your own lifestyle and financial discipline, you can make sure you don’t take on more than you can afford.

Compare today's home loan rates

Rates last updated June 20th, 2019
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Loan purpose
Offset account
Loan type
Repayment type
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.59%
3.59%
$0
$0 p.a.
80%
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees. UBank will cut its variable rates for new and existing customers on June 28, making this rate even lower.
3.44%
3.44%
$0
$0 p.a.
70%
A simple mortgage with no application or ongoing fees that has extra repayments plus split and redraw options. Requires a 30% deposit.
3.47%
3.48%
$0
$0 p.a.
90%
Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online. Available with just a 10% deposit.
2.99%
4.19%
$0
$0 p.a.
90%
Get one of the lowest rates on the market with this fixed rate mortgage. Available with just a 10% deposit. Guarantor option available. NSW, QLD and ACT residents only.
3.39%
4.41%
$300
$10 monthly ($120 p.a.)
90%
A low fixed rate loan that lets you borrow up to 90% of your property's value.
3.79%
3.82%
$445
$0 p.a.
90%
NSW and ACT customers only. Get a special discount for a limited time when you open an IMB Transaction Account.
3.57%
3.61%
$0
$0 p.a.
95%
A simplified mortgage with a low interest rate and a redraw facility. Approval fee waived for a limited time.
2.99%
4.09%
$395
$0 p.a.
80%
A one year fixed rate offer with no ongoing bank fees.
3.54%
3.54%
$0
$0 p.a.
80%
Low fee loan with extra repayments. Pay no application and ongoing fees and take advantage of split and redraw options.
3.49%
3.52%
$500
$0 p.a.
95%
This mortgage combines a very sharp interest rate with a 100% offset account and it's available with a 5% deposit.
2.99%
4.40%
$0
$395 p.a.
90%
Get one of the lowest fixed mortgage rates on the market plus a 100% offset account. Available with just a 10% deposit. Guarantor option available. NSW, QLD and ACT residents only.
3.59%
4.62%
$445
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. 2 years fixed interest terms and free access to redraw facility online.
3.49%
3.49%
$0
$10 monthly ($120 p.a.)
95%
Lock in a competitive rate for three years while you pay off your home. 100% offset account attached.
3.24%
3.88%
$395
$0 p.a.
80%
A competitive fixed interest rate product with no ongoing bank fees.
3.65%
3.66%
$500 (if over 80% LVR)
$0 p.a.
80%
A competitive variable mortgage for home buyers. This loan has flexible repayments and an optional redraw facility.
3.44%
4.51%
$300
$10 monthly ($120 p.a.)
90%
Home buyers can lock in a very competitive fixed interest rate for 2 years.
3.59%
4.35%
$600
$0 p.a.
95%
Competitive rates for fixed for 3 years with no ongoing fees.
3.50%
3.55%
$600
$0 p.a.
90%
Competitive variable rate mortgage with a partial offset account. Get this loan with a 10% deposit.
3.44%
3.48%
$0
$10 monthly ($120 p.a.)
80%
Get a competitive variable rate and a 100% offset account.
3.85%
4.18%
$500
$0 p.a.
95%
Apply for Easy Street fixed rate home loans and get a competitive loan with a fixed interest rate.
3.59%
3.99%
$0
$395 p.a.
95%
Get interest rate discounts and waived fees on this package loan with a 100% offset account. $500 cashback offer for first homebuyers borrowing over 80% and paying LMI.
3.74%
4.13%
$0
$349 p.a.
90%
Package your loan with other AMP products and save on rates and fees.
3.57%
3.58%
$0
$0 p.a.
110%
Pay no deposit or LMI and get a discounted rate with this family pledge loan. Requires a family member to act as guarantor. NSW, Qld and ACT only.
3.79%
3.79%
$0
$0 p.a.
80%
Access an offset account and pay no application or ongoing fees on this special variable rate for owner-occupiers.
3.99%
4.97%
$445
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. A 3 years fixed rate investor which allows extra repayments to be made.
3.74%
3.74%
$0
$0 p.a.
70%
Investors with a 30% deposit can get this low rate loan to fund their property portfolio. Take advantage of split and redraw facilities.
3.79%
3.79%
$0
$0 p.a.
95%
Competitive, flexible rate mortgage with simple features and low fees. Low deposit option available.
3.59%
3.48%
$0
$0 p.a.
70%
Get a low interest rate and a mortgage with flexible, basic features. No application or ongoing fees. Requires a 30% deposit.
3.69%
4.21%
$0
$10 monthly ($120 p.a.)
90%
Get a low discounted rate for 2 years plus a 100% offset account. And you can get the loan with a 10% deposit.
3.99%
4.00%
$500 (if over 80% LVR)
$0 p.a.
80%
A variable investment mortgage with flexible repayments and an optional redraw facility.
3.89%
4.29%
$0
$395 p.a.
95%
A package loan that offers discounts and a 100% offset account.
3.59%
4.53%
$445
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. 3 years fixed interest terms and free access to redraw facility online.
3.49%
3.48%
$0
$10 monthly ($120 p.a.)
90%
Fix to a low interest rate for two years while paying off your home and taking advantage of a 100% offset account.
3.99%
3.99%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required. UBank will cut its variable rates for new and existing customers on June 28, making this rate even lower.
3.64%
4.63%
$300
$10 monthly ($120 p.a.)
90%
Low fixed rate loan for home buyers. Available with a 10% deposit. 100% offset account attached.
3.97%
4.28%
$0
$299 p.a.
80%
A competitive package rate for loans above $150,000. Optional 100% offset account.
3.63%
4.74%
$0
$0 p.a.
90%
A package home loan with a sharp fixed rate and a 10% deposit option for low deposit borrowers.
3.44%
3.70%
$0
$248 p.a.
70%
Borrowers with a 30% deposit can get this competitive rate. Cut down on interest costs with a 100% offset account.
3.57%
3.58%
$0
$0 p.a.
90%
New customers can get a discounted variable rate and a fee-free redraw facility. NSW, QLD and ACT residents only.
3.69%
3.86%
$0
$0 p.a.
95%
This high LVR fixed rate loan allows you to borrow up to 95% of the value of the property you're buying. Approval fee waived for a limited time.
3.39%
4.38%
$0
$395 p.a.
90%
A fixed rate loan with a 100% offset account and the option to make additional repayments. Loans over $150000 receive a discounted rate. NSW, QLD and ACT residents only.
3.39%
4.57%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.

Compare up to 4 providers

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