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How much can I borrow? How much should I borrow?

Marty McDonald - Wednesday, March 23, 2011

How much can I borrow? How much should I borrow? An age old quandary that most people have faced at some point in time. It is sometimes easy to get swept up in the moment and over extend yourself when you find your dream home that you have been searching for every weekend for the last 6 months! And surprise surprise when you find that dream place it's just above your price range...isn’t it always?

Lenders and how much can I borrow?


While lenders will sometimes over lend in a given scenario they will also under lend in other scenarios. As a mortgage broker with a choice of 20 + lenders all with their own policy niches and different methods of calculating borrowing power we can often find a lender who is willing to lend considerably more in a given scenario than another lender would. While often there is nothing wrong with this sometimes it can be a disaster as it means the borrower has been left with a loan that while on paper they can afford in reality they struggle with. This is why not only lender's and broker's have to lend responsibly but also why any borrower with an ounce of common sense should also be asking question of themselves in regards to what they can actually afford.

So how do I work out how much I should borrow?

While there is no one size fits all answer to this question lets break it down to basics. Income less ongoing expenses less general living costs (including any buffer that you deem required) equals the amount available to service a new loan.

So once you have worked out how much you have available to service a new loan jump onto any home loan calculator and working backwards see what that equates to as a loan amount. As most people opt for variable rate loans you should also be looking to use an interest rate of not less than say 8% pa or the current mortgage rates available plus a buffer of say 2% whatever is higher. If fixing for say 4 years or more it would probably be OK to use the current fixed rates available.



- John & Jane have net income after tax per month of $8500 between them.

- They have an existing car loan with repayments of $600 / month

- They have calculated their base living costs to be $3200 / month

- They want a buffer on their living costs of $500 / month for luxuries and holidays.


So all up they have $4200 to service a new loan ($8500 - $600 - $3200 - $500 = $4200). Over 30 years and with an interest rate of 9% pa (current rates are around 7% pa) they should therefore be able to service a loan of $520,000.

Here is my repayment calculator:



How much can I borrow?


To give you an idea of the differences between lenders in the above example we have one lender who would lend, wait for it ...$824,000! A whopping $304,000 more than what the couple should be borrowing based on their own figures.


How much can I borrow if I know my financial circumstances will improve greatly in the near future or I am willing to make sacrifices to get that dream house?


This is where you have to make a decision as to whether borrowing that bit extra is going to be worth the compromise in lifestyle in the short term. Using the example above say John and Jane were willing to forgo a few of life’s luxuries and put holidays to the side for a while. By cutting out some of their discretionary spending and having a smaller buffer they may well be able to service a loan of somewhere between the two loan amounts of $520,000 and $824,000. How close they want to go towards the $824,000 limit depends on how much they are willing to change their lifestyle. Not recommended for people that are not disciplined!


In summary how much can I borrow is not always the same as how much should I borrow!


The first step for all potential borrowers should be to work out what they think is a reasonable amount to repay each month and work backwards from there to determine your maximum loan amount. Hopefully you can then find a lender who agrees with you. That is where we can help!




Marty McDonald

About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on  and LinkedIn.

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