How much is it safe to borrow, really?

Even though mortgage regulators are cracking down on how much banks are lending, chances are they will still extend you too much, writes Nicole Pedersen-McKinnon.

“How much can I borrow?” It’s a question I get asked all the time… and it’s the wrong one. The right one is: “How much should I borrow.” Because, even though mortgage regulators are cracking down on how much banks are lending, chances are they will still extend you too much. And it’s tempting, when you’ve found the property that makes your heart skip a beat, to close your eyes and take them up on it… without any thought for the wallet-walloping consequences. UNO/">How much can I borrow?Use UNO's calculator to estimate your borrowing capacity. Calculate Now

How much is too much?

How much you can safely borrow comes down to three very simple factors: the size of your deposit (and additional cash for costs), the size of your (possibly combined) pay packet and your expenses. Let’s start with that elusive deposit (or the equity you have in an existing home when refinancing). Ideally, you’d never make a real estate move without a 20% deposit. I say this because, not only does it give you a nice margin of safety if prices dip, it means you escape the rort that is lenders’ mortgage insurance. This is insurance for which you pay the premiums but from which a lender gets the protection. Rampaging property prices in recent years, however, have made a 20% deposit a huge challenge for first homebuyers. Still, it isn’t wise to even think about leaping into the property market without a 10% deposit (and enough cash for costs, including a few thousand extra dollars for the requisite lenders’ mortgage insurance). “But how do you know what a 10% deposit is?” I hear you ask. Easy – you multiply your savings as they grow by 10 until you get a figure large enough to buy something somewhere you’d think about living. So if you had $30,000 allocated for the deposit, you could consider paying up to $300,000 for a property. If you had $70,000, you could possibly go up to $700,000. If you’re a first-time buyer, you should stop roughly between a hovel and a stately home. But it’s not just about the deposit and potential property value; there’s another vital test you need to perform to sanity check how much this means you’d be borrowing. The reason is that interest rates are currently so low as to be – ironically – dangerous.

Crunching the final numbers

Contrary to popular belief, the key to your homeowner comfort is not plush couch cushions or designer bathrobes, but capping your borrowings such that you can sleep blissfully at night. To do that you need to familiarise yourself with a concept called mortgage stress, which – as implied – you never want to experience.

Thanks to the larger loans Aussies are taking out just to get a foot on the property ladder, the severe mortgage stress felt in the late ‘80s and early ‘90s would today be experienced at an interest rate of just 8%. Mortgage stress occurs when interest rates rise to such an extent that you find yourself tipping more than one-third of your before-tax household income into your home loan. You want to give yourself enough breathing space to ensure that never happens. It might seem unnecessary when rates could well stay at these historic lows for a good while yet and then rise only slowly? Point taken. But remember, they increased six times in just eight months after the world nearly fell off a financial cliff thanks to the credit crack up. And forget what you’ve heard about the 17% interest rates of the late ‘80s and early ‘90s. Thanks to the larger loans Aussies are taking out just to get a foot on the property ladder, the severe mortgage stress felt then would today be experienced at just 8%. Now that I have your attention, the final step to finding your safe borrowing ceiling is figuring out the loan repayments you’d need to make if you borrowed what the above deposit test suggested. Just multiply your annual before-tax salaries by 0.3333, then divide the result by 12. So if you bring home $150,000, you would get $49,995, divided by 12 – or $4166. This gives you the amount you should be able to comfortably afford to pay each month. But you also want to mortgage ‘stress test’ this for rate rises. We’ll use the $70,000 deposit and a potential $700,000 property. Use UNOs’ online repayment calculator and plug in a competitive 4% rate for a loan of $630,000 with no fees… at $3325, you should be able to cover monthly principal and interest repayments without a problem. But what if rates rose to 7%, or more than $1200 extra a month? You’d be nearly $400 into mortgage stress. So the sensible move would be to reduce what you borrow to keep safe in the event of a 3 percentage point rate rise: $590,000. Lenders are now supposed to do this for you. But there’s no one with your best financial interests more at heart – forget how much you love a property – than you. This information is general in nature and you should always seek professional advice when making financial decisions. How much can I borrow?Use UNO's calculator to estimate your borrowing capacity. Calculate NowBook in a quick call with our customer care teamNicole Pedersen-McKinnon is a commentator and educator who presents her Smart Money Start*, fun financial literacy incursion,** in high schools around Australia. Follow Nicole on Facebook at [Nicole Pedersen-McKinnon Money**](https://www.facebook.com/NicolePedersenMcKinnonMoney/). * Book a call in with UNO
5 stars for our service reviews from clients

Book Call Now

UNO home loans

Try Plans, by UNO
Mortgage calculators completely reimagined
Get Started
Considering a purchase or refinance?

Try Plans by UNO

Mortgage calculators completely reimagined
Get Started
☎️ 🚫 No cold call promise

Related Articles

TESTIMONIALS

What our customers are saying

Matt Carter
May 21, 2025
5 stars for our service reviews from clients
Paul from Uno has been amazing. Made it so easy! Highly recommend and made the finance process much more enjoyable experience for us.
Read more
Timothy Semsarian
May 17, 2025
5 stars for our service reviews from clients
UNO went above and beyond to help my wife and I with our home loan and settlement. Couldn’t recommend them enough - Jake Wood was an absolute legend! Kept us informed during the whole process and was very thorough with his work, even with a very tight timeframe. Thank you again for all your help, and looking forward to continue using your services!
Read more
Patti Jo Mogensen
May 16, 2025
5 stars for our service reviews from clients
100% Rockstar. We found Paul and Uno Home Loans from recommendations from people who had used his services. We know understand why he comes so highly recommended. We definitely put Paul and his team under pressure due to an oversight our end which meant that he had to don his superman cape and work miracles for us. We didn't appreciate the very very short window we created for ourselves (think less than two weeks for settlement). Paul was able to wave his magic wand, come up with multiple solutions to our situation and make it all happen seamlessly. It goes without saying then, without reservation that we recommend Paul and his team as our trusted mortgage advisor! Thanks again Paul. *****The limoncello is on route we promise :)
Read more
Lani Wards
May 13, 2025
5 stars for our service reviews from clients
Paul Davey worked very hard to get us the mortgage we required for our investment property. He is knowledgeable and approachable. Thanks Paul!
Read more
Michael Badham
May 13, 2025
5 stars for our service reviews from clients
Our entire process with Uno went very well. We had a unique set of requirements for our loan and our super friendly broker Mike Parsons managed to secure us the perfect outcome. Mike also worked above and beyond our expectations to make sure the whole process of completing the documentation of switching banks went smoothly.
Read more
Vanessa Koster
May 13, 2025
5 stars for our service reviews from clients
The service recieved from Paul was fantastic. He made the whole process stress free & easy. We started the process from NZ & Paul had everything ready for approval as soon as we landed in Aus. I would highly recommend Paul if you require a mortgage. You won't be dissapointed.
Read more
Peta Hemmings
May 13, 2025
5 stars for our service reviews from clients
Paul has been amazing throughout our entire home loan process, we have recommended him to many of our family and friends. He has been extremely helpful and professional right from the beginning.
Read more
Ryan Whittle
May 12, 2025
5 stars for our service reviews from clients
Highly recommended, Paul and his team made the process very streamlined delivering the best possible results.
Read more
Tiana Perez
May 10, 2025
5 stars for our service reviews from clients
Paul and Dalby were incredible to deal with, from the first interaction with Paul a few months prior, to getting approval to purchase, through to the last minute helping us with the final settlement details. Their communication was second to none and they truly went the extra mile. Paul managed to get us more borrowing power than dealing with the bank directly. I couldn't recommend Paul and his team enough. Paul and Dalby, thank you so much for putting hours and hours of work into our application. We really appreciate it!
Read more
Nicholas Violaris
April 14, 2025
5 stars for our service reviews from clients
Can not recommend UNO Home Loans enough, Scott Wilkinson and his team have helped us get a home loan in no time and they have been a breeze to deal with, great job guys, looking forward to working together more in the future
Read more
Lahnie Cooper
March 26, 2025
5 stars for our service reviews from clients
Jake Wood was a pleasure to work with and made this process extremely easy for me! I highly recommend Jake and the team at Uno.
Read more
Daniel Demosthenous
March 18, 2025
5 stars for our service reviews from clients
The team at UNO were absolutely fantastic at helping me set up and organise my new property purchase, Andrew answered all my questions promptly and went over and beyond to reassure me at any stage with his abundance of knowledge of the matter, also a big thank you to Dalby and Jena for helping with the process as well.
Read more