Can versus should

Just because you can afford to buy something, does that mean you should? 

It’s a question we frequently need to ask ourselves, and it’s a particularly important one to consider when it comes to borrowing money to purchase property. Just because you have been approved for a loan does that mean you should borrow the full amount? 

Borrowing capacity

Once your financial commitments have been evaluated by your lender, they will tell you how much you can borrow – your ‘borrowing capacity’ – but it is important to assess this amount carefully.

It’s not the straightforward guide that it might look like. While a lender may be willing to lend you one amount, it’s important to consider carefully how large a mortgage you can personally manage. It may actually be less than your borrowing capacity.

With interest rates decreasing, the cost of borrowing has become more affordable. But the financial environment changes constantly and what you can afford today might not be what you can afford tomorrow. 

It is also wise, when assessing your capacity to borrow, to include a buffer for interest rate increases of a percentage point or two – because things never stay the same.

Mortgage stress ‘Mortgage stress’ is commonly defined as the need to spend more than 30 per cent of your monthly income on home loan repayments. This may well put extra strain on your income and lifestyle.

While this figure may be a useful guide, it will not necessarily mean the same to every income level and every home buyer or investor.

Instead, you need to think about your own propensity to take on debt and what level of debt might be too stressful for you.

Lifestyle factors

When considering how much debt you want to take on, you need to take a look at your lifestyle and how willing or able you are to make adjustments to the way you live.

If you’re happy to curb your spending, you may be able to manage a larger debt, but if overseas holidays and dining out are high on your agenda, you may need to compromise on your property price tag.


Can versus should
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