Just because the bank says you can borrow half a million dollars, should you?

It's a dilemma Auckland financial adviser Hannah McQueen comes across all the time. "I'm usually the one fighting the banks saying: "On what planet is that loan affordable?"

McQueen says people too readily accept their bank's word on how much they can borrow without crunching the numbers themselves on what they can afford.

"We think the banks are our friends - and they are - but it's an expensive friendship. They spend a lot of money on marketing but they are a business.

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"Just because you can do something, it doesn't mean you should."

McQueen says people need to remember banks and mortgage brokers make more money the higher the loan is.

"It is important to step back and ask: "What is my strategy to get rid of this mortgage?"

McQueen says borrowers also need to take a step back and work out their financial goals - and to ensure those goals match up with the person or persons you are borrowing with.

"There's no point in living in a nice house if you're just going to get divorced."

Working it out

She suggests testing out how much the mortgage payments would be to help borrowers figure out if it is something they can live with. The Sorted website's mortgage calculator can tell you how much the repayments are going to be over different terms and at different interest rates.

Sorted spokesman Julian Light says it recommends people also enter in a higher interest rate than those being offered by the banks.

"We'd recommend people apply 8 per cent or higher to give them an accurate level."

Light says first home buyers can be drawn in by seemingly cheap mortgages and end up borrowing up to their maximum leaving nothing for other costs which come with owning a home. Those should include rates, insurance and money for maintenance.

Sorted blogger Tom Hartmann says a key question people should themselves is: "Can you really see yourself repaying that much?"

Be honest with your bank

Kirk Hope, chief executive of the New Zealand Bankers Association, says it's vital potential borrowers are honest with their bank.

He says banks undertake as full an assessment as possible of people's costs and spending but rely on the borrower telling them of any future plans which could see the income level dropping, such as having a family or taking a break from work to study.

Hope says at the end of the day banks also want to protect themselves and make sure there is enough to cover the loan.

"Mortgagee sales are in nobody's interest," he says.

Hope encourages borrowers to get in touch with their bank as soon as possible if their circumstances change. If they think they can't make the payment then borrowers could go on a mortgage holiday or restructure the loan to stretch it out over a longer timeframe lowering the repayment levels.

Hope says it is better to get in touch sooner because once a loan payment is defaulted on the options are reduced and borrowers can't make a hardship claim allowing them to take a mortgage holiday.

Consider alternatives

McQueen says borrowing a smaller amount does not necessarily stop you from buying a property but may mean you can't afford to buy the one in the area you want to live in.

"I think some people just can't afford the home they want and they need to make peace with that. It could mean buying a rental somewhere much cheaper and renting where you want to live."

Can you afford the mortgage?

• work out the repayments on the Sorted mortgage calculator
• build in a buffer for higher interest rates
• ensure you factor in expenses like rates, insurance and maintenance
• work out a budget and see if you can afford it
• think about how the cost might affect your lifestyle and choices
• Ask: what is my strategy to pay off this debt?