With housing prices having surged over the last 20 years it’s become virtually impossible to buy a home without a mortgage. The scary part for a lot of people is that they don’t understand safe borrowing limits and without a clear understanding of their own financial position, they often overcommit. It’s easy to understand how… once you start looking at buying a house you start to want a better house, you see that for an extra $50,000 you could live two suburbs over in a better house and a better location, and the bank will lend you the money, so why not?
Mortgage Stress is a term we use when someone’s mortgage repayments are greater than 30% of their gross income. This is a recommended debt ceiling for most people but the truth is that a rule of thumb is never a good way to work out whether you can or can’t afford a house.
What Banks will lend you
Banks will lend you the amount they think you can repay, but the simple truth is that you must know what you can afford to repay and not trust a standardised one-size-fits-all bank calculator to tell you what you can afford. For most people, the bank will lend you far more than you would want to repay. An average couple working full-time and earning $75,000 each can borrow up to $985,000. The repayments will be $5,074pm, totalling just under $61,000pa. This is over 40% of their combined gross income AND we’re at historically low interest rates. Cue mortgage stress.
It’s hard to imagine a situation where that’s a good idea for someone, but it’s not the banks job to determine whether or not you can repay that money, it’s yours and yours alone. You may be incredibly frugal, like this lady, or you may be struggling on $250,000. It’s not up to the bank to go through your finances and work out your affordability.
Live within your means
The number one thing we all must do, is live on our terms within our means. Just because a bank will lend it, definitely doesn’t mean you should borrow it. Live within your means, save a good deposit and be certain that you can repay the loan in good times and bad. Ask the ‘what if’ questions – what if I lose my job, what if my partner stops working, what if something unforeseen happens?
Make smart money choices and you’ll save yourself a lot of pain. Let banks make your financial decisions for you and you’re likely to end up in a situation you don’t want to be in.
What can you do about a home loan you can’t afford?
Depending on the situation you’re in you generally have three options; downsize, earn more or refinance. Downsizing involves selling your current house for a more affordable one. Not an ideal choice, but compared to being financially stressed out for the next 30 years it’s a no-brainer. Earning more involves getting a second job, applying for a better job, getting a promotion, doing whatever it takes to get your income up so that your mortgage becomes more affordable for you. Refinancing may or may not help depending on a number of factors, but there are many ways to refinance and restructure your mortgage to make it more affordable.