The Bank Says You Can Borrow $700k. But Can You Actually Afford It?

Key Takeaways

• The maximum a bank will lend you isn't necessarily the amount you should borrow.
• The famous "30% rule" is a useful warning light, not a universal affordability test.
• Look at what you're left with after the mortgage, not just the mortgage percentage.
• Your real housing cost includes rates, insurance, strata and maintenance too.
• Stress-test your repayments at a higher interest rate before committing.
• If the mortgage only works when everything goes right, that's worth knowing before you sign.

You get pre-approved for a $700,000 mortgage.

Great. The bank has answered one question:

"Are we prepared to lend you this much?"

It hasn't answered the question you probably care about more:

"Can I borrow this much and still have a life?"

Because there's a big difference between being able to make a mortgage payment and being comfortable making it every month for the next 30 years.

A loan can pass the bank's serviceability checks and still leave you counting down the days until payday.

And with new owner-occupier principal-and-interest home loans averaging 6.17% in June 2026, the difference between a manageable mortgage and a painful one can be hundreds of dollars a month.

So forget your maximum borrowing capacity for a minute.

Let's work out what you can actually afford.

Key Takeaways

• The maximum a bank will lend you isn't necessarily the amount you should borrow.
• The famous "30% rule" is a useful warning light, not a universal affordability test.
• Look at what you're left with after the mortgage — not just the mortgage percentage.
• Your real housing cost includes rates, insurance, strata and maintenance too.
• Stress-test your repayments at a higher interest rate before committing.
• If the mortgage only works when everything goes right, that's worth knowing before you sign.

The Bank's Number Isn't Your Number

Banks don't just pull your borrowing capacity out of thin air.

They look at your income, debts, expenses and other commitments and assess whether you can service the loan. APRA currently requires banks to apply a 3 percentage point serviceability buffer when assessing residential mortgages.

So if your actual mortgage rate were 6%, the lender isn't simply assessing you as though rates will stay at 6%.

There are other safeguards too. Since February 2026, APRA has limited the amount of new lending banks can issue at debt-to-income ratios of six times or more.

That's useful.

But these are lending and financial-stability safeguards.

They're not a personalised answer to:

Will I still be able to travel?

Can we afford kids?

Can I keep investing?

What happens if the car dies?

Can I go out for dinner without feeling guilty?

The bank has its test.

You need yours.

What About the 30% Mortgage Rule?

You've probably heard some version of:

"If your mortgage costs more than 30% of your income, you're in mortgage stress."

It's not quite that simple.

The commonly cited 30/40 measure is generally aimed at lower-income households rather than acting as a universal affordability line for every Australian household.

The reason becomes obvious once you look at actual dollars.

Imagine two households:

Both spend 40% of their take-home income on the mortgage.

But one has $3,000 left each month.

The other has $7,200.

And even that doesn't tell us enough.

Household B might have two kids in childcare, two car loans and a stack of other expenses. Household A might be a single person with no debt.

That's why asking:

"What percentage should my mortgage be?"

isn't quite the right question.

A better one is:

"What does my life look like after I've paid it?"

Start With What's Actually Hitting Your Bank Account

For this exercise, start with your monthly household take-home pay.

We're not trying to replicate the bank's serviceability model.

We're trying to work out whether you'll enjoy living with the mortgage.

Take:

Monthly take-home income

minus

Mortgage repayment

minus

Normal living expenses

minus

Other debts

minus

Actual homeownership costs

minus

The amount you still want to save

and see what's left.

That last part matters.

If the mortgage technically fits after groceries, electricity and petrol — but you've got $40 left at the end of every month — you haven't suddenly discovered an affordable mortgage.

You've discovered a very tight budget.

Your $3,500 Mortgage Isn't Really a $3,500 Housing Cost

This is one of the easiest things to underestimate when moving from renting to owning.

Say you're currently paying:

$3,000 a month in rent.

You've found a place where the mortgage would be:

$3,500 a month.

Easy.

Only $500 extra, right?

Not necessarily.

Your mortgage isn't your entire cost of owning the home.

Depending on the property, you could also have:

• council rates
• building/home insurance
• strata or body corporate fees
• maintenance
• repairs
• water and other property charges

Moneysmart specifically tells prospective buyers to budget for costs such as council rates, insurance, body corporate fees, utilities, maintenance and repairs.

So imagine your actual numbers looked like this:

These figures are illustrative — your property could look completely different.

But that's the point.

The comparison wasn't really:

$3,000 rent vs $3,500 mortgage.

It was closer to:

$3,000 rent vs $4,480 total housing budget.

That's a very different decision.

Do the Bad-Year Test

Most people calculate whether they can afford the house based on what life looks like today.

Test what happens when life gets slightly worse.

Not financial-apocalypse worse.

Just annoyingly, realistically worse.

Test #1: Rates Rise 2 Percentage Points

This isn't a prediction that interest rates are going up another 2%.

It's a stress test.

Moneysmart recommends prospective buyers calculate what their costs would look like if interest rates increased by 2 percentage points to give themselves some breathing room.

Take a hypothetical:

Mortgage: $600,000 Loan term: 30 years Interest rate: 6%

Monthly principal-and-interest repayment:

~$3,597

Now change nothing except the rate.

At 8%:

~$4,403/month

Difference:

~$806/month

That's roughly:

$9,700 extra a year.

Again, we're not saying your mortgage will hit 8%.

The question is:

If it did, would your finances still work?

There's a big difference between:

"That would be annoying. We'd eat out less and temporarily save less."

and:

"We literally couldn't pay it."

You want to know which camp you're in before buying the house.

Now Break Something

Okay.

The mortgage works at today's rate.

You've even tested it at a higher rate.

Now the car needs $2,500 of repairs.

Still okay?

The hot-water system dies.

Still okay?

You get a surprise dental bill.

Still okay?

You need to fly interstate for a family emergency.

Still okay?

The point isn't to hold enough cash to survive every possible disaster simultaneously.

It's to work out whether one completely ordinary piece of bad luck sends you straight to the credit card.

If buying the property wipes out every dollar you have and the mortgage then absorbs every spare dollar you earn, that's part of the cost of the decision too.

This is where an emergency fund stops being boring personal-finance advice and starts becoming genuinely useful.

What If One Income Disappears?

For couples, run another test.

Not:

"Could we comfortably pay this mortgage forever on one income?"

For plenty of households, that's unrealistic.

Instead:

What happens if one income disappears for three months?

Maybe you lose a job.

Maybe someone gets sick.

Maybe you're between contracts.

Maybe one of you takes time away from work after having a child.

Could you keep making the mortgage payment?

Your answer might be:

Yes. We'd be fine.

Or:

Yes, but we'd stop investing, cancel a few things and use some emergency savings.

Or:

No. We'd be in trouble almost immediately.

Those are three very different mortgages, even if the bank approved all of them.

Let's Actually Test That $700,000 Mortgage

Back to the headline.

Imagine a couple bringing home:

$10,000 per month after tax.

They're considering a:

$700,000 mortgage

over:

30 years

at a hypothetical:

6% interest rate.

The mortgage repayment is approximately:

$4,197/month

So after paying the mortgage, they've still got:

$5,803.

Doesn't sound too bad.

Now let's actually give the rest of their money somewhere to go.

These aren't "average Australian household expenses". They're deliberately hypothetical.

Your numbers are the ones that matter.

But now we actually have something useful to discuss.

After the mortgage, home costs, basic expenses, debt and $500 of saving, this couple has about:

$1,953/month

for eating out, clothes, subscriptions, hobbies, holidays, gifts and everything we've forgotten.

Maybe they're perfectly comfortable with that.

Maybe they're not.

That's a personal decision.

But now let's run our bad-year test.

Same House. Same Income. 8% Interest.

At 8%, that $700,000 mortgage would cost approximately:

$5,136/month

That's about:

$939 more every month.

Using exactly the same hypothetical budget:

And suddenly the question isn't:

"Can we afford a $700,000 mortgage?"

It's:

"Are we comfortable with how little room this could leave us if conditions change?"

That's a much better question.

So What Percentage of My Income Should Go to the Mortgage?

Here's the annoying answer:

There isn't one percentage that works for everyone.

The 30% figure isn't useless.

If your minimum mortgage repayment consumes a huge chunk of your income, that's absolutely something worth paying attention to.

But don't turn it into:

29% = financially responsible

31% = financial disaster

Instead, use the percentage as the beginning of the conversation.

Then ask:

How much money is actually left?

What are our unavoidable expenses?

Can we still save?

Can we absorb a higher interest rate?

Do we have an emergency buffer?

What expenses are likely to change over the next few years?

Can we still afford the things that make our life enjoyable?

That tells you far more than one percentage ever will.

Don't Build a 30-Year Mortgage Around Your Best-Ever Paycheque

Let's say your base salary is:

$100,000.

But last year you made:

$125,000

because you worked stacks of overtime.

Great.

Just be careful about building a permanent mortgage around the assumption that the extra $25,000 will always be there.

Same goes for:

• bonuses
• commissions
• overtime
• temporary allowances
• side-hustle income
• unusually good business income

None of those things are bad.

Some can be extremely reliable.

But ask yourself:

Does the mortgage still work if that extra income disappears?

If the answer is no, you're not necessarily making the wrong decision.

You're just accepting more risk.

Know that before you buy.

"But My Income Will Go Up"

Maybe it will.

If you're early in your career, there's a reasonable chance you'll earn more five or ten years from now.

And a mortgage that feels big today may feel considerably smaller after years of income growth.

That's a legitimate consideration.

But there are two sides to that equation.

Income can increase.

So can expenses.

You might have children.

You might want to work fewer hours.

You might change careers.

Your partner might take time away from work.

The house might need work.

Your priorities might simply change.

So by all means consider future income growth.

Just don't make it the emergency plan.

Future pay rises should make the mortgage easier — not be the only reason it works.

Try the Mortgage Before You Buy It

This might be the simplest test in the entire article.

If your current housing costs are $2,500 a month and you're considering a property that'll cost you roughly $4,000 a month all-in:

Start putting away the extra $1,500 every month now.

Do it for three or six months.

Don't touch it.

Pretend it's gone.

At the end of the experiment, one of two things has happened.

You realise:

Actually, this is fine.

Great.

And you've built another few thousand dollars of savings in the process.

Or:

This sucks. We don't want to live like this.

Also useful.

You just learned that before taking on hundreds of thousands of dollars in debt.

If you're still saving for a deposit, the First Home Super Saver Scheme is one government scheme that can genuinely help reduce the tax you pay while saving.

The No BS Mortgage Test

Before borrowing the maximum the bank offers you, run the mortgage through this:

1. What percentage of our take-home income goes to the mortgage?

There's no magic number.

Just know yours.

2. What's left after ALL housing costs?

Mortgage + rates + insurance + strata + maintenance.

3. What happens if rates rise 2 percentage points?

Not because they definitely will.

Because you want some breathing room.

4. Could we handle a surprise $2,000 expense?

Without putting it on a credit card?

5. Could we survive a few months on reduced income?

What would we cut first?

6. Can we still save?

Even if it's not a massive amount.

7. Can we still have a life?

This one matters more than personal-finance spreadsheets sometimes admit.

If owning the "dream home" means spending the next decade terrified of brunch, holidays and your electricity bill, make sure that's actually a trade-off you want.

And finally:

If the bank offered us $100,000 less, would our life actually be worse — or would our mortgage just be smaller?

That's worth thinking about.

The Verdict

The biggest mortgage you can get isn't necessarily the biggest mortgage you can afford.

Your bank has its own tests.

You need yours.

Look at the repayment. Look at everything else homeownership will cost. Look at what's left. Then deliberately make the numbers worse and see whether your finances survive.

Because getting approved for the house is only the beginning.

You still have to live in it — and pay for everything else for the next 30 years.

Sources

• Reserve Bank of Australia: Housing lending rates (Table F6)
• APRA: Update on macroprudential settings (serviceability buffer)
• APRA: Activating debt-to-income limits as a macroprudential policy tool
• Australian Bureau of Statistics: Guide to housing affordability statistics
• ASIC Moneysmart: Ongoing costs of home ownership
• ASIC Moneysmart: Buying a house (stress-test your repayments)

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