Last Updated: 1st March, 2023

When deciding how much to spend on a home you need to consider three main things:
  • How much you can afford
  • Long-term planning
  • Your attitudes towards money
Before going into these in more detail, we need to understand why this is such an important decision.

Why is it important to spend the right amount on a home?

Chart showing different cost of selling and buying a house

Let’s say you can afford to buy a home for $2 million but you decide to buy a home for $1 million so you can spend more on your lifestyle. This works well for your lifestyle but it may be a bad financial decision.

Let’s say a $1 million home suits your needs at present. But in the future, your needs may change. For example, if you start a family, you might want a larger home with good schools nearby and easy access to good public transport. So you might decide to sell your home and buy a larger home. That is when you might lose money. Selling a home and buying a new one is expensive. When you sell, you can expect to spend about 3% of the value of your home on things like real estate agent fees and marketing; when you buy, you’ll pay about 4-5% of the value of the property in things like stamp duty. And the market may have gone up by, say, 30% since you bought your first home. A home worth $1 million when you first bought would be worth $1.3 million, and a $2 million home would now be worth $2.6 million. The person who bought the $2 million home right away would be $590,000 better off! You are in a much worse financial position if you buy a home that doesn’t meet your long-term needs. On the other hand, if you spend too much or buy a bigger home than you’ll need in the long term, your lifestyle may suffer, or you may land in financial distress.

How much can I afford to spend on a house?

The amount you can afford to spend on a home depends on the size of your deposit and your borrowing power.

Long-term planning

First-home buyers, younger ones especially, need to think about how their needs may change. Having children and other lifestyle changes can dramatically change what you look for in a home. If you’re older, you may want to consider how your needs will change if you have children and they leave home. A good way to start is by having a discussion with your partner and deciding what’s important. As a general rule, most first-home buyers borrow close to their maximum. Why do they do this?
  • They need to get into the market.
  • They are early in their career and expect their income to grow; this means they’re fine sacrificing their lifestyle for a few years.
  • They may want a larger home, so they have room to start a family.
I agree that for most first-home buyers, this is the right choice. Our customers in their 40s tend to be upgrading their home. They sometimes borrow to their limit and sometimes they don’t. It depends on what they need for their family. Meanwhile, customers in their 50s and 60s tend to borrow far less than they can afford. And I think this is usually the right approach for them.

Your attitudes towards money

Some people are comfortable taking on debt and others find it quite scary. Some people save religiously, while others spend. Some people invest in shares or property, while others keep their money in the bank. Our attitudes towards money come from our personality, our upbringing and our past experiences. Generally, we see financially conservative customers make two big mistakes. They:
  • Delay buying a home – the market rises, which costs them money.
  • Spend less than they can afford – they need to upgrade later, which costs them more.
This is because they usually don’t consider that not owning a home may be a risk! When you wait to buy a property, you face the risk of prices rising. It’s scary to buy a property, which can be a big emotional hurdle to overcome. Less cautious customers tend to make other mistakes:
  • Buying a property without a pre-approval – They may be unable to get a loan and lose their deposit.
  • Spend more than they can afford – This causes financial hardship and a challenging lifestyle.
This is because they often act before they have done their research or do not have expert advice. So your financial attitudes have a major impact when deciding how much to spend. They also have a big impact on property investors and how they behave.

How much you spend on a home is a personal choice

Our mortgage brokers can assess your situation and give you the best options, but it really comes down to you. You need to decide for yourself:
  • How much do I feel comfortable paying?
  • What is more important, my financial future or my lifestyle now?
  • What are my long-term needs? Will I have children?
  • How is your attitude towards money affecting your decision?
To speak with one of our mortgage brokers, call 1300 889 743 or complete our free no-obligation assessment form.