How much more could you borrow?
When you apply for a home loan, the bank looks at your ability to meet repayments. They do so by calculating your income after tax and then deducting expenses and existing debts. Next, they add your new mortgage and look at the amount you have left over, add a safety buffer, and then check to see that it’s enough to pay your monthly mortgage with a surplus remaining.
A couple of extra hundred dollars a month might translate to an extra $30,000 in borrowing power. If you’re saving $400, you might be looking at a difference of up to $60,000.
That can make the difference between your dream home and a compromise.
Alternatively, you might choose to keep your loan amount the same but pay it down faster with your increased income. Thanks to the magic of compound interest, you can save around $20,000 on a $400,000 mortgage by directing an extra $120 per month to the principal. With tax cuts putting more money in your monthly pay cheque, and interest rates at record lows, there’s never been a better time to apply for a home loan.
