How Much Can You Really Afford
to Borrow From the Bank?

The most important consideration when purchasing a home is the amount you’re able to pay based on your budget. While some are able to pay cash for their home, the majority of people borrow money from the bank to finance one.

Before you decide on the target price range of your new house, there are some factors you should consider.

What is the lender willing to let me borrow?

The lender will collect financial information from you in order to determine the amount they will allow you to borrow. You first need to provide information about your annual income from work and investments, and the amount of your monthly expenses. One of the most important pieces of information a borrower provides to a lender is the amount of their down payment.

A larger down payment can help the borrower secure a lower interest rate as well as a lower mortgage insurance payment. And the more often you make payments, weekly, fortnightly, or monthly, the lower your interest costs can be. Interest is important to a buyer because you can afford a more expensive home when your interest rates are lower.

The lender collects all of this information from you and applies their complex formula to determine the highest amount they can lend to you. They will also provide you with an estimated payment based on that amount.

Remember, this figure is the most the bank is willing to lend you, not the amount you have to spend on your new home.

What can you comfortably afford to pay?

Often times a lender will allow you to purchase a more expensive home than you’re actually comfortable making payments on. For many families, it actually makes more sense to purchase a less expensive home than what the lender is suggesting you can afford. For others, they want to buy a home near the top of the budget the lender has established.

By spending less money on your home, you will be able to save more towards maintenance, repairs, and updates, unexpected emergencies, and other lifestyle expenses. But if you’re generally frugal or expect your income to increase substantially, you may feel comfortable spending at the higher end of your mortgage budget. No two families are alike, so you’ll need to make the decision about affordability based on your specific circumstances.

What expenses do homeowners incur?

You’re now a proud, new homeowner and you will be able to see firsthand the expenses associated with owning a home.

If your home is newer, then you should not have a lot of maintenance issues right away. But you should also start saving for them so you’ll be prepared when a scheduled or unexpected repair bill arrives. If you decided to purchase an older home, then your repairs will likely start sooner rather than later.

Your roof, furnace, and electrical systems will need periodic updates, and so will your carpets, floors, and appliances. Monthly expenses will start to kick in from utility bills to trash removal services and water usage.

You can furnish your new home with the furniture you’re currently using, but you’ll probably also want to purchase some new furniture, especially if your new house is larger than your current place. You’ll have to buy window coverings as well, and equipment to take care of your lawn and garden.

No two families will spend their money in the same way, and you should only consider a mortgage that fits your budget as well as your lifestyle. Learning what the bank will allow you to purchase is just the first step in financing your new home.