My friend and prolific blogger, Neerav Bhatt (@neerav on twitter), asked me to write a guest post for his Rambling Thoughts blog about how much debt is too much when it comes to buying a house. In pulling the post together, @dlbsmith was very helpful, allowing me to tap into her knowledge of bank home-lending practices. Here is an extract of what I wrote.
So you’ve saved up a deposit for your first house, you want to take advantage of the government’s first home owner grant while you still can, and the bank is actually prepared to lend you money. But how much should you borrow?
While Australia has not had the same problems with “sub-prime” borrowers finding themselves too deep in debt for a house which has collapsed in value (house prices can and do go down as well as up), there are certainly still people who have borrowed too much and are struggling to make their mortgage payments.
Once upon a time, many banks had rules of thumb for the maximum size for a home loan. A common rule was to lend no more than three times the borrower’s annual income (before tax). These days, even in the wake of the “global financial crisis”, it is not uncommon to hear of people being offered loans or four or five times their annual income.
Just because a bank is prepared to lend you enough to buy the house of your dreams doesn’t mean that the loan they are offering you isn’t too big! Borrowers have to decide for themselves how much is a safe amount to borrow and how much is too much.
You can read the full post here.
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