How much should you borrow when buying a home?

Wondering how much you should borrow to buy a new home?

Lenders go by the standard ‘rule of thumb’ that an individual’s monthly housing payment (your mortgage, plus taxes, insurance, etc.) should be no more than 28% of your monthly income, before taxes.

However, everyone has different financial situations, so how much should you borrow?

Here are a few things you should keep in mind when considering your loan:

How much have you saved?

The amount you’ve saved toward making a down payment should be the first thing to look at.

If you’re down payment is 20% or more of the sales price of the home you want to buy, you can avoid paying lenders mortgage insurance (LMI). This is an insurance policy that protects the lender from financial loss if you get to a point where you can’t afford to keep up with the home loan repayments.

Saving up for a larger down payment saves you from having to worry about LMI and will reduce your monthly payment, potentially saving you thousands.

In addition to avoiding LMI, the more money you save for your deposit, the less you will need to borrow and the more leverage you will have when searching for the best loan terms.

Lenders will be much happier lending to you as they’ll see you as a more trustworthy borrower.

How much is your debt?

If you’ve still currently got a large student loan, or consumer debt, you’ll want to aim for a house payment that will be less than the 28% figure. This will give you a little more financial flexibility, in case something unexpected occurs which negatively impacts your income.

How much house do you need?

Before picking a price range based on what you can afford, consider how much house you actually need.

What kind of lifestyle do you live? And what kind of house do you need that improves that lifestyle? Select among homes that meet your lifestyle preferences and borrow only what you need to get the house you want.

Be a mindful borrower

Buying a home is an exciting experience, and you want it to be a happy one. Additional stresses, especially financial ones can hinder that happiness.

So keep an eye on houses that fit what you need, without breaking the bank. Owning a house shouldn’t mean stretching beyond your means and making your life harder.

The goal here is to ultimately borrow less.

It means you’ll be able to make additional payments toward your loan as your income grows or as you decide to trim your expenses. This will reduce your total financial expense and the overall cost of your house.

Keep in mind - a happy borrower is a happy home owner.