How much is too much debt?

Buying your first home doesn't have to be a financial headache. There are ways to ensure you don't overstep your mortgage budget and borrow more that you can afford.

As a first-home buyer, you might have grand designs on a home sporting the same luxuries as your parents' three-bedroom turf, but outlining a realistic mortgage limit will help you avoid nasty surprise costs.

Firstly, do your research to determine what you can actually afford. This will de-mystify lender appointments and allow you to get down to the business of discussing current loan products. Compare loan features like repayment types and frequency against your income and financial commitments. Your borrowing capacity will depend on your annual income and job security.

Most lenders suggest that a single person on one income should not spend more than 35 percent of their gross income on loan repayments, while double-income earners should budget for around 40 percent. You can use the Home Loan Calculator on RateCity to calculate estimated mortgage repayments on different borrowing amounts to find out how much you can afford.

However, your mortgage repayments – whether fortnightly or monthly – are not the only regular expense that comes with home ownership. You should also factor in upfront costs such as stamp duty and legal fees, and more importantly, long-term costs such as insurance, council rates and strata fees if you are considering buying an apartment. You should add these regular bills to your estimated mortgage repayments and ensure the total sum stays below 35 percent or 40 percent of your gross income.

And keep in mind that interest rates don't always stay put – they may have dropped recently, but they are also likely to rise in the future.

When you have worked out your mortgage limit, turn your attention to the property market – how are property prices behaving in your chosen suburbs? Will you be able to stay within your mortgage limit? You might have your sights set on a particular area, but be realistic about location. Researching neighbouring suburbs could knock $40,000 to $50,000 off asking prices.

Finally, envision how long you will stay in your first home before upgrading the nest. What will its financial value be in five to 10 years? Looking at what sort of maintenance your place will need over the course of your stay also helps prepare for future costs.

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