The 20/20 House – part 2
The Gruen Eco Design blog about how to convert your dream for an energy efficient home into a reality.
How much money can you borrow from the bank to build your dream home?
The question of how much money you can borrow depends on many factors.
For instance, how much money are you and your partner earning per year? Do you have any debts, investment properties? How many credit cards do you have?
As a first step. If you do want to live in your own home you do have to speak with your bank or mortgage broker, to find out how much you can borrow. This amount will determine if and where you will be able to buy or build. And also what kind of build it can be. For most of us, money is sitting tight. So the high-end mansion in Toorak is just not an option.
We personally have opted for a mortgage broker, rather than a bank. As our needs are quite unique and this way we were able to compare many different scenarios.
In order to get a mortgage pre-approval and to know how much money we could potentially borrow we had to provide the following documents.
- 2 most recent payslips (if employed)
- Tax returns for 2 years
- If you have investment properties you will also need rental appraisals and a valuation of the property
- Information about any personal loans you might have (in our case a car loan)
- Information about any credit cards you have and what the limit on each card is
- Proof of identity (like a drivers licence and passport)
- Some banks also want a list of the general expenses you have
In our case, we have 3 credit cards, of which we only use one. The other ones are just for emergency. However, when it comes to the banks they assume the worst case scenario, hence assume all cards would be maxed out. Which is deducted from your income and hence reduces how much money you could potentially repay? Same goes for any other personal loans. They influence negatively your borrowing capacity.
I personally think the most important thing to keep in mind is that it’s not all about how much money you can borrow. The more important question is “how much money can you afford to pay back monthly”? Do you have to make sacrifices in order to repay the mortgage? And are you willing to make these sacrifices?
For us as a family, we have decided that we don’t want to be slaves to our repayments. All our family is in Germany and Italy, so we still want to visit them sometimes. And we do want to see the world and travel with our 2 girls. Therefore we have decided to move away from the city a bit further, 10 minutes further from where we live now. Which means we are still close enough to our current group of friends. But land is a bit more affordable.
In our case, this also means for now we can only borrow enough money to buy a block of land to build on. But we are not able to borrow enough money yet to build our dream home. In order to be able to build our house, we will need to pay off our car in the next year and also need to cancel 2 of our credit cards. We also want to sell our current unit.
We now have the banks approval and are officially house hunting. Wish us luck!
In the next blog, I will talk about the process of looking for the perfect side to build on.