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A borrowing rule-of-thumb

I am interested in buying my first home but I am worried about interest rates. I want to know how much I can borrow. I am on $80,000 a year and my wife-to-be is on $50,000 but we don’t have any real expenses to pay off as we use debit cards rather than a credit card and we own our cars, which probably bring our most significant expense each year, apart from rent, which would go when we buy a house.

To find out how much you can borrow, you can use the home loan calculators that most of the banking and lender websites display. But there’s a more important question and that is – how much should I borrow?

To start with, make sure you know how much you have clear and will there be one or two salaries. Make a judgement on how stable your income is and what other regular repayments there are in your life, such as car loans or HECS. Also make sure you have a plan B if something goes wrong. An insurance plan might be a good idea. You need to have your credit card life under control and have a good credit history to ensure you can demand the best interest rates.

Once you nail all of these important issues, next comes the really important piece of information for borrowers.

In working out your borrowing limit, lenders use what is called the debt-service ratio and this is the ratio of loan repayments to your gross income. As a rule of thumb, single income earners have a ratio that should not exceed 35 per cent. But get this, for double income earners, the ratio should not exceed 40 per cent!

That means if your combined gross income is $130,000 a year, then your repayments each year should not exceed 40 per cent of that figure which is $52,000 or $1000 a week.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Monday, August 30, 2010

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