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How much to borrow for a home if you want to avoid financial stress

15 Oct 2020

Technically speaking, if more than 30 percent of your pre-tax income goes towards paying your mortgage, you meet the common definition for being ‘mortgage-stressed’¹ – and it’s more common than you think!

For example, let’s look at Jen and Sarah.

When Jen and Sarah were house hunting for their first home, they were on decent incomes and had saved a healthy deposit. Even so, they were cautious and did their homework, entering their information into several bank and credit union online calculators to determine their borrowing capacity.

They entered:







Pre-tax salary:

$140,000 annually

Living expenses:

$3,000 monthly

Current mortgage repayments:


Personal loan repayments:

$400 monthly

Credit card limits:


How much?

The highest amount suggested by one bank was $1 million with monthly repayments of $4,387 over 30 years. Based on their current combined income this would take up 38% of their pre-tax income.

The problem is, if inflation is low and wage growth is next-to-nothing, it would only take a slight increase in living expenses, or a small interest rate rise to potentially stretch Sarah and Jen thin.

Online calculators generally use limited information to give applicants an idea of what might be available to them. Supporting a mortgage for up to thirty years needs a lot more detailed consideration.

Just because you could borrow that amount, doesn’t mean you should.

Jen and Sarah heard about a different formula that would give them a more manageable and realistic borrowing power estimate.

New formula

Instead of using their pre-tax income, they used their after- tax income of $110,7662, then applied 25% of this to calculate their monthly expenses which equalled $2,308. This gave them a borrowing power estimate of $761,0003. This means their monthly repayments would only take up 26% of their pre-tax income instead of 38% (like in the first calculation) meaning they would be well below the 30% mortgage stress threshold! #winning

Although they were a little disappointed at the new estimate being lower, Jen and Sarah knew it would give them a lot more freedom and a lot less stress in the long run.

They decided to continue growing their deposit by increasing their saving contributions.

Increasing their loan deposit

Sarah’s friend is saving for a home deposit by being a house-sitter and suggested they do the same. He basically lives rent-free in exchange for caring for pets and plants. While this sounds amazing, the nomadic lifestyle doesn’t suit everyone, and Sarah’s friend occasionally ends up on his mum’s couch between house sitting. With a small child, unfortunately this wasn’t an option for Jen and Sarah.

So, they decided they would rent their spare room to Jen’s niece while she is studying at a nearby university. It’s been a more realistic way to grow their deposit, not to mention a cheap baby-sitter!

They are hoping to buy their dream home soon – with a realistic budget in mind and without ‘financial stress’.

1 AHURI: Mortgage stress, rental stress, housing affordability stress: what’s the difference?

2 $75,000 + $65,000pa = $140,000pa combined income after tax and Medicare levy.

3 Calculated at 2.64% interest over 30 years, not including fees or charges.

This is general advice only and doesn’t take into account your objectives, financial situation or needs. Conditions, fees and lending criteria apply and are available on request.