The amount of mortgage debt that we are thinking of to get our family home boggles my mind. I know we are setting ourselves up for the rest of our lives but it is such a scary figure. Our monthly budget can afford the repayment, things will be abit tighter, but we think it will be worth it in the long run. How do you get your head around owing so much money? We live in Sydney, so any thoughts on what you think would be a ridiculous borrowing amoutn would be helpful Thanks
I wouldn't really know what a ridiculous borrowing amount would be, as I don't live in Sydney and its all relative I guess - its only a ridiculous amount if you cannot afford to repay it or have any kind of life because the mortgage costs so much. What is a ridiculous amount for one person may seem perfectly reasonable to someone else. But I think that as long as you have your budget worked out and you can comfortably afford the repayments, remembering to factor in the possibility of interest rate rises in the future - and they will rise, its just a question of when - then you *should* be ok. Good luck with your new home!
The rule of thumb with renting or with home loans used to be not to pay more than a third of your income in either rent or home loan. I can't remember whether that was gross or take-home pay after tax though.
The problem is that banks will lend you a lot more than this. Our bank offered to loan us an amount that would have us paying 60% of our income towards the home loan. We told them no thanks.
If you'll be paying more than a third of your income towards the home loan, I'd be very cautious.
On paper, it always looks like you can afford more because you always forget things that you should have factored in.
Also need to be very consicous of where your money is going and what is coming in. DH did a budget for us and my first reaction was 'Where has all our money gone?'. But he had allowed for an extra $5 a day for childcare, assumed that the tenants moved out of the investment property so we were still paying the mortgage but not getting any money from them, he assumed that the government would cancel the CCTR too, assumed no tax returns etc.
So we had an amount set aside for the budget that we could afford to pay back each month. We allowed for an extra 2% interest rate rises for how much we borrowed too. Any extra money we get (tax returns, CCTR, rent) we try and funnel straight into the mortgage so we are paying more than the minimum each month.
Also depends on what your lifestyle is like - do you eat out a lot, go on holidays etc? If so, do you really think you can give up on that for the mortgage.
The most important thing I think is to have a few years at the beginning where you try and put a lot extra off your loan to try and reduce the principal and knock some time off at the end.
Fiona - I would assume that the 30% would be for takehome pay as you never get to see the rest of it.
We live in Sydney too and when we took out our mortgage, we did up a full budget and made sure we still had money left over in case of interest rate rises, utilities costing more, losing job and all that sort of thing.
I dont have any qualifications and I earn only a small salary, but DH works as a teacher (still not a huge salary) but its a permanent government job so its secure. We bought our place (a 2 bedroom unit) 4 years ago and we borrowed about $250,000 in total. I think the repayments were like $750 a fortnight or something. I wouldnt have wanted to have a loan any biggger than that really, because 3 weeks after we moved in, I got fired from my job for no reason and because I was temping I had no leg to stand on regarding unfair dismissal and so on. The loss of my income was a bit of a blow and the money was tight because I didnt expect to get fired like that, but we made sure that we could afford our mortgage repayments on just my husbands income, just incase I did lose my job. Definately take that into consideration if one of you doesnt have a stable job.
When budgeting, put in EVERYTHING. Include things like the obvious bills, but also consider repairs your car might possibly need, gifts you buy for family/friends through the year etc. Have a look at your bank statement to see what youre spending money on and have a look at what the council and water rates are like in your area. We're in Sydney and our water is $135 per quarter. I was a bit shocked when I got my first water bill. I'm not sure what I was expecting but at the time I remember thinking what a rip off! LOL
On getting my head around owing heaps - I'm not too worried about the amount we owe anymore though. We're lucky now that our fornightly repayments have gone down quite a bit due to us paying off extra, and are the same as what we would be paying if we were renting the same unit (i stalked the real estate when my neighbour was renting out their identical unit and they are charging just over what we pay in mortgage).
When we applied for the loan, the bank was going to offer us heaps more. When I looked at the repayments I decided it would be so dumb to borrow more just because they would lend it. Dont borrow more than you can afford. Banks will offer you more than what you can afford. Its so dodgy! I wouldnt ever get a loan with repayments of more than about 25-30% of our take home pay.
Jump onto a mortgage calculator and put the interest rate up to 10% - then see if your budget can still handle it. Interest rates might be low now but the minute inflation slows they will start to rise again.
Fiona is right - the rule of thumb is no more than 30% after tax. It might seem manageable to pay more than that at first but you really need to stick under that long term or you can't factor in emergencies like being sick for a month or needing a new washing machine or things like that.
How much mortgage debt is too much?
Thanks
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