Borrowing Finance? How much is too much in 2024-2025?

Renovation Collaborative

Are you pondering taking a very large home loan to renovate, build or buy a new house?

If the size of it is making you hesitate, you're not the only one.

In today's episode, I speak to a financial adviser and get a second opinion on inflation, interest rates and what everyone is spending on home loans in 2024-2025. Plus, you'll find out how to work out the right amount to borrow for your situation and how much is too much.

I talk to highly respected financial adviser Tim Ward from Ward and Co. Wealth in Brisbane.

KEY POINTS SUMMARY

To conclude today, I want to draw your attention to three main points.

1. Interest rates are remaining fairly steady. We are at the end of the interest rate rising cycle. However, another rise is not out of the question because inflation still remains high.

2. Australians are taking out higher mortgages than ever before. You are not alone. Ten years ago, the average Australian mortgage was around $600,000 to $700,000 across major capital cities. Now we're starting to see seven figure mortgages across major capital cities for new entrants to the property market.

3. A financial adviser can help you determine the level of home loan debt that's affordable for your personal situation. This can include budgeting, cash flow management, and stress testing to ensure that you can tolerate a level of interest rate rise comfortably.

ADDITIONAL ADVICE FROM TIM WARD

Steps to help you work out the right amount to borrow

The best process to do this is to reverse engineer what you can afford. These steps will ensure that you can live within your means and do not unknowingly force yourself into undue financial pressure.

Step 1. Most importantly, don't use the maximum borrowing capacity afforded to you by the bank.

Step 2. Create a budget with all your non-discretionary and discretionary items. Non-discretionary are things that you have to pay, like rates, utilities, phones, insurances. Discretionary items are things that you choose to pay for entertainment, for quality of life and lifestyle.

Step 3. See how much is left over for paying off your home loan.

Step 4. Stress test your affordability of the loan and this means if interest rates increase 2- 3% from current rates, can you still afford them?

How much is too much to borrow in 2024-2025?

In Australia, the typical cost of housing as a percentage of gross income has been around 25% to 30%. How much is too much? The answer is definitely not one size fits all.

As a general guide, if your home loan repayments are higher than 30% of your gross income, you're more likely to struggle with financial stress. If you're on a high income, you may be able to go over this 30%, but Tim advised that 30% is a good general benchmark.

INTERVIEW QUESTIONS

01:01 Can you tell us what is happening with home loans, interest rates and inflation?

03:38 You said that inflation was sticky – what do you mean by that?

04:10 What size mortgages have you been seeing over the past few years?

09:11 How do financial advisers help people to make the right decision on loan size?

15:01 How do financial advisers help people secure their investments over the long term?

16:07 If people are considering getting advice from a financial adviser, how do they start?

17:02 How do financial advisers general charge?

WANT TO READ MORE?

Download the written version of the entire interview as a PDF.

S1:E10 – How much is too much -Transcript

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RESOURCE LINKS

Tim Ward, Ward & Co Wealth

www.wardandco.com.au

CONTINUING PROFESSIONAL DEVELOPMENT (CPD)

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www.renovationcollaborative.com.au/continuing-professional-development/

GET IN TOUCH

That brings us to the end of Season 1. Renovate or Sell in 2024. I really hope that the information from the podcasts has helped you start moving forward in the right direction.

The podcasts are about finding answers to your questions. We would love to hear from you if you have any questions, ideas, or feedback.

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