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How to work out how much you can borrow

How to work out how much you can borrow

Borrowing money that you can’t afford to pay back could end up seriously harming your long-term financial plan, and leave you with a range of nasty consequences. Asking yourself: How much can I borrow (home loan wise) can save you lots of stress down the track.

To do this, you simply need to take the time to assess the current costs in your life, how much you’d be comfortable paying back each month, and whether or not there is a loan available that can accommodate to these needs.

First Step: Assess your current living costs

When asking yourself: How much can I borrow? Home loans are only one part of the equation. Before you reach this stage, the first thing you need to do is figure out how much life is costing you at the moment. Make a list of how much you’re spending on everything including the basics such as food, utilities, school fees, medical bills and any other loans you may have. Don’t leave anything out!

Also factor in the luxuries you currently pay for, such as shopping trips, weekends away, furniture and personal grooming. You might find that you can afford to borrow more money if you cut back on a few things, but you’ll also want to consider the kind of lifestyle you’d like to lead while you’re repaying your loan. Remember that mortgages are a long-term commitment, so it’s a good idea to make sure you aren’t roughing it out too much!

Next Step: Work out how much you can afford to pay each month

Once you have a clear figure that indicates how much your lifestyle is costing you, it’s time to calculate how much you could afford to pay back and still maintain your quality of life. To do this, work out your total cash income, including inflow that comes from employment, investments and other endeavours.

Subtract your total outflows from your total inflows to get an idea of how much you’d have left over to make repayments on your loan, and what you might have to cut out in order to make room for repayments, plus interest.

Then: Compare loans

After you’ve worked out how much you can afford to pay back, shop around for a loan that fits in with your needs. Take into account the interest required, and whether you’d be more comfortable with a fixed-rate or adjustable-rate loan.

You might find that there is a loan available that comes at a rate that you are able to pay back comfortably, or you might find that you could afford a particular loan if you make some adjustments in your life that you’re happy with. Once you know what’s available and what you can afford to pay back based on what your current costs are, you’ll have a clear idea of what is an appropriate amount to borrow and what is the best kind of loan for you.