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

1. Set a reasonable – and realistic – budget

Our borrowing power calculator will give you a good idea of how much you may be able to borrow. Determine not only how much you can borrow, but how much you should borrow. Take a hard-nosed look at your finances and prepare a realistic budget.

The base for these funds and budget should not be a ‘best case scenario’ but one that optimistically estimates your likely future income. It will also need to take into account your future plans such as starting a family.

A mistake many people often make 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 be dominated by your mortgage.

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 maintaining) a home. These range from the obvious (stamp duty, legal fees), to the easy-to-overlook (utilities, building and contents insurance).

Get an estimate of what you could afford to borrow and compare different home buying scenarios.

Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.