How much is it safe to borrow, really?

“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. 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**]( * Book a call in with UNO

Book Call Now


What our customers are saying

Gabe Windsor
October 26, 2023
What a fantastic experience using UNO Home Loans. Mike Parsons and the team were exceptional. Such an easy, hassle free experience, cannot recommend them highly enough. Mike Parsons was in touch every step of the way, and with him doing all the leg work, the transition to a refinanced home loan was a very easy one. Thank you!
Read more
Laurisa Sticotti
July 1, 2023
Scott Wilkinson has been fantastic when dealing with my broking needs. He has held my hand through every step of the way and has made purchasing my first home a much more comfortable experience than I anticipated.
Read more
Thusi Gamage
July 1, 2023
Awesome team, Very reliable and friendly. Scott Wilkinson is very experienced and knowledgeable.He guided us throughout the process and was available to help.
Read more
Omar Zazou
June 1, 2023
I have worked with Scott Wilkinson to get my home loan and he has been a massive help to navigate my first home purchase. He has taken care of all the financial details and I didn't need to worry about anything. Highly recommend him for his professionalism, patience and support!
Read more
Kelly O'Connor
June 1, 2023
You won’t find any broker better than Anita at UNO. We’ve told all our friends and family about her and will be using her for all our mortgages in the future! A stress free process from the start. She listened to our needs and was always available.
Read more
Ashley Morson
We are truly grateful for uno home loans and our broker Karis Churchill. This is our second time purchasing a home with the help from Uno and both times have been a very positive experience. Our recent purchase had many obstacles due to different factors however it was our dream home and we were up for the challenge. Our broker Karis was a true support and went above and beyond. She communicated so well with our solicitor and the real estate agents. She kept us updated through every step and kept us motivated when things seemed impossible. Uno is very fortunate to have Karis as a broker and we would highly recommend her to anyone. Our family are so happy we are now in our new forever home. Thank you so much Karis and to the uno team!!!
Read more
Ebubekir Demir
Thank you Eren for your quick and efficient turn around time to getting an approval for a loan. Will be recommending you to anyone that needs a quick and reliable loan.
Read more
No items found.