With house prices rising, it’s easy to get carried away and spend more than you can afford. But borrowing to your limitmaxing out the mortgagecomes at a cost. Here are six things you can do to stop your home becoming a burden.

Give me the main points

  • Work out a reasonable – and realistic – budget.
  • Buy the ‘right-sized’ house.
  • Factor in the possibility that interest rates may rise.
  • Hope for the best, but plan for the worst. Build a buffer.
  • Consider income protection insurance. Just in case.
  • Be mindful of the additional costs on top of the purchase price.

1. Set a reasonable – and realistic – budget

A decent borrowing power calculator will give you a good idea of how much you may be able to borrow.

The next question, perhaps the most important one, is not how much you can borrow, but how much you should borrow? Here, you need to take a hard-nosed look at your finances and prepare a realistic budget.

This should not be a ‘best case scenario’ - one that optimistically estimates your likely future income. And it’ll need to take into account your future plans such as starting a family.

Another mistake is to devise an ‘austerity budget’. While buying a house will involve some sacrifice, it’s important to live life. You don’t want to become a slave to your mortgage. And you really don’t want to eat baked beans three times a day.

2. Buy the ‘right-sized’ house

The average size of a new house in Australia is 243 square metres. Our houses are the biggest in the world. Forty per cent bigger than in 1985, despite the fact average family sizes are shrinking.

Why buy a bigger house than you need? Ask yourself if you really need that second garage. That third bathroom. That fourth toilet.

3. Expect interest rates to go up one day

Interest rates on the average mortgage in Australia are lower than at any time since the late 1960s. But it’s unlikely they’ll stay this way forever, certainly not over the life of a 30-year mortgage.

Err on the side of caution. Could you afford an interest rate rise of 2%? Perhaps. Factor it into your calculations just in case. You want some wriggle room.

4. Save a buffer to shield you from tough times

It’s Budgeting 101: keep money in reserve in case your circumstances change.

It could be bad news like interest rate rises, illness or redundancy, or the happy news of a baby on the way. Either way, you don’t want to be living on the edge.

Having a buffer equal to three month’s outgoings is a good target to aim at.

5. Consider income protection insurance

If you’re on your own (and have a mum who’ll welcome you back home) you might decide income protection insurance is unnecessary. However, if you have your own family—or if you’re someone who lies awake at night fearing the worst—it might be a wise bet.

It’ll cover a percentage of your income if you get sick, or injured and can’t work. You might also want to look at mortgage insurance which simply covers the mortgage (and is cheaper).

6. Houses cost more than just the sale price

In addition to your deposit—which might be 20 per cent of the purchase price—you’ll need several thousand dollars to cover the associated costs of buying (and running) a home. These range from the obvious (stamp duty, legal fees), to the easy-to-overlook (gas/power/phone/internet connections; building and contents insurance).

Can you afford that home?

Get an estimate of how much you could borrow in around 3 minutes.

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