Borrowing Capacity vs Budget Capacity
A phrase I heard many years ago has stuck in my mind and encapsulates the title of this article.
“Just because the bank says you can borrow a certain amount of money doesn’t mean you can afford to.”
It neatly sums up the difference between your theoretical borrowing capacity i.e. what the bank says they can lend you and what you can afford in real life i.e. borrowing capacity vs budget capacity. Your real life affordability is the critical factor. This cannot and should not be overlooked.
How do you work this out?
You need a budget. There’s no avoiding this step. You can’t do it by guessing what you can afford to pay. You need to know the facts.
If you’re currently renting and saving for a home, your affordability could be a combination of the rent you’re paying and a proportion of the amount you are saving. Remember, there are more costs to owning a home than the mortgage payments.
If you already have a property and are looking to upgrade, which involves a bigger loan, or buying an investment property the need for a detailed budget is equally important.
People can get themselves into financial difficulties with loan repayments when this step is over looked or avoided.
At Halogen Home Loans we always investigate client’s household expenditure budget as part of our Client Needs Review. It is a critical step in the assessment process to make sure clients aren’t over stretching their budget. It’s part of responsible lending.
If you’re thinking of a home or investment property loan please contact us so we can balance your Borrowing Capacity vs Budget Capacity before you make the commitment.
Leave a Reply