How much can I afford to repay?
Percentage of income
Some say that fixed payments (mortgage repayments plus any other loan or hire purchase payments) should be no more than 30–40% of gross income.
If you know your income and what your existing fixed payments are, you can work backwards to find the level of mortgage repayment a lender will allow. Then you can experiment and see what size loan you could afford with these repayments.
It’s important to consider the impact on your ability to meet your repayments if interest rates go up. Not sure how to calculate mortgage repayments? Our mortgage calculator will help you see what the payments would be if the interest rate went up by 1%, 2% or more.
Some lenders also have calculators on their websites to give a rough idea of how much they may lend. These calculators may not take into account your current debt situation, so you’ll need to contact the bank or a mortgage broker directly to get a better indication.
Some lenders calculate a minimum ‘surplus’ that we should have left over each month after fixed payments and a living allowance are deducted. This is called ‘UMI’ (uncommitted monthly income) and varies from bank to bank.
For a couple, the calculations are based on combined income. For someone with children, lenders will expect to see less surplus.
If you’re borrowing a high proportion of the purchase price, lenders will expect you to have more spare income. This is so you can deal better with any future uncertainties like a rise in interest rates or a reduction in income. For example, if someone is borrowing 95%, some banks will want to see a UMI of $750 to $1,000 a month.
Flatmates helping with the bills
Planning to get flatmates in to help pay the mortgage? Some lenders will count 70% to 80% of their rent towards your income. Other lenders won't include any.
The easiest way to find out how much you can borrow through a lender is to give them your income and spending details and ask them to make the calculation. Or, you could ask a mortgage broker to do this.
Based on the details you give them, a lender may give ‘pre-approval’ of the amount they are willing to lend. The key is to treat this as an upper limit rather than a starting point!