How Much of Your Income Should You Spend on Loan Repayments?

23 August 2021

If you’re looking to buy a home or investment property, it’s important that you can comfortably afford your repayments. So how much of your income should go towards your repayments?

Read on to find out.

Avoiding mortgage stress

Most lenders consider that spending more than 30% of your gross (before-tax) income on home loan repayments puts you at risk of mortgage stress. If you get into mortgage stress, you will have difficulty affording your repayments.

Most lenders therefore won’t approve a loan application if your repayments will be higher than (or close to) 30% of your gross income.

According to the latest figures from the Australian Bureau of Statistics( ABS), the average gross weekly wage in Australia for full-time adult workers is $1,737.10. 30% of that wage is $521.13.

Let’s assume that you and your partner are both earning the average gross wage. The maximum amount you could afford to pay without getting into mortgage stress  is $1,042.26.

Lenders will want you to be paying less than this amount to approve your application. The more under this amount you are, the less risk of you getting into mortgage stress.

According to the ABS, the average home loan in Australia is now $728,500. That would require a weekly repayment of $630 over 30 years at an interest rate of 2.1%.

You can use our loan repayment and borrowing power calculators to give you an idea of your repayments and how much you might be able to borrow based on your income.

Other factors to consider

You should consider how your circumstances might change in the future when you’re working out how much you can afford to repay on a loan.

For example, if you’re planning on starting a family. This can temporarily reduce the amount of combined income you earn. It will also increase your expenses, leaving you with less disposable income to use for your loan repayments.

You should also factor in potential interest rate rises that will increase your repayments.

The importance of budgeting

Lenders will require you to do up a budget as part of the loan application process. It’s important to prepare a realistic budget of your income and expenses. You need to demonstrate that you can afford your repayments. Try to eliminate or reduce any non-essential expenses.

If you’re buying an investment property, you will be able to include a portion of your tenant’s rent payments as income. However, you should also budget for any property expenses.

Once you’ve prepared your budget, it’s important that you stick to it.

About us

Our experienced and licensed brokers at Wisebuy Investment Group  can help you to find the right home or investment property loan for your needs.  We can also help you with your loan application.

We service a diverse range of clients in Newcastle, Lake Macquarie and Maitland, and we work with more than 60 lenders in the Australian market.

Contact us today for an obligation-free chat. We’d be happy to answer any questions you have.