The bank saying yes, and you being financially comfortable are two different things.
A lender may approve your loan.
You may have enough for the deposit and purchasing costs.
Settlement may be ready to go.
But what will be left in your account the day after you collect the keys?
That question does not get enough attention.
A lot of buyers work towards a single number: the deposit. Once they reach it, every other dollar becomes part of the purchase. That can leave them owning the property but with no breathing room.
A deposit is not a cash buffer
Your deposit helps complete the purchase. Your buffer helps you hold the property once real life starts happening again.
The buffer is what covers things like:
- An unexpected repair
- A higher-than-expected first repayment
- Strata or council rates
- Insurance excesses
- Moving expenses
- A period without rental income
- A change in employment
- A temporary reduction in household income
- An interest-rate increase
- Costs that were missed in the original property budget
Without a buffer, even a manageable issue can end up on a credit card or personal loan. This is not the position you want to be in immediately after taking on a mortgage.
The lender’s serviceability buffer is not your buffer
When a bank assesses a home loan, it does not simply check whether you can afford the repayment at the advertised interest rate. APRA currently requires banks to assess new residential borrowers at an interest rate at least three percentage points above the actual loan product rate. The purpose is to test whether borrowers could continue meeting repayments if rates or expenses increased. This sounds reassuring, but it is important to understand what it means.
The lender’s serviceability buffer is a calculation.
Your cash buffer is actual money you can access.
Passing the bank’s test does not mean you have cash available when the hot-water system fails, a tenant moves out or your income drops for a month. You need both.
So, how much cash should you keep?
The slightly boring answer is: it depends. The more useful answer is that your buffer should be based on the risks you would need to cover, not a random round number.
A simple way to think about it is:
Personal emergency fund + property holding reserve + known short-term costs = your cash buffer
Each part serves a different purpose.
Start with you personal emergency fund
Your emergency fund should cover ordinary household expenses if something unexpected affects your income.
Moneysmart suggests aiming for enough to cover around three months of expenses, while recognising that some people may need more depending on their employment, family responsibilities and circumstances.
To calculate the starting point, look at your essential monthly costs:
- Home loan repayments
- Groceries
- Utilities
- Insurance
- Transport
- School or childcare costs
- Medical expenses
- Minimum debt repayments
- Other unavoidable household expenses
Multiply that amount by the number of months you want the fund to cover. Someone with two stable incomes may be comfortable with a different buffer from a single-income household, a contractor or a self-employed borrower.
There is no prize for choosing the smallest possible number.
Add a property-specific reserve
Your personal emergency fund and property reserve are related, but they are not necessarily the same thing.
For an owner-occupier, the property reserve may need to cover:
- Initial repairs or maintenance
- Furniture, appliances and moving costs
- Council and water rates
- Strata levies
- Building and contents insurance
- An insurance excess
- A higher repayment following a rate change
For an investor, it may also need to cover:
- A vacancy period
- Property management fees
- Repairs and maintenance
- Landlord insurance
- Council, water and strata costs
- Compliance-related expenses
- An insurance excess
- A special levy
- A shortfall between rent and loan expenses
Investment property costs continue even when the rent does not arrive.
Moneysmart notes that borrowers investing in property still need to meet the loan and ownership costs when investment income is lower than expected, and recommends keeping cash available so an asset does not have to be sold simply to access money quickly.
Allow for the costs you already know are coming
Not every expense is an emergency. Some costs are predictable, but buyers forget to keep money aside for them.
These may include:
- Conveyancing and settlement adjustments
- Removalists
- Initial repairs identified in the building report
- Renovations
- Furniture and appliances
- Rates and strata levies
- Insurance
- Loan establishment costs
- Immediate safety or compliance work
Keep these costs separate from your emergency fund.
Money you already expect to spend is not a buffer;
It is part of the purchase budget.
Stress-test the position before buying
A good property budget should be able to survive more than the perfect scenario. Before committing, run a few simple tests:
WHat happens if repayments rise?
Do not only calculate the repayment at today’s rate. Look at what happens if the loan rate rises by one or two percentage points.
Would the repayment still fit comfortably within the household budget?
WHat happens if income drops?
This could be because of parental leave, illness, contract work slowing down, a job change or a decision to reduce working hours.
How many months could you maintain the loan and essential expenses?
What happens if the property needs work?
Even a newer property can produce an unexpected bill.
Would a $5,000 repair force you to use a credit card, or could it be managed from cash?
What happens if an investment property is vacant?
Calculate the cost of holding the property for several weeks without rent, and make sure to include the mortgage, insurance, property management, rates, strata and other fixed expenses.
What happens if an investment property is vacant?
Some buyers focus so heavily on reaching settlement that they do not budget for the first three months of ownership. Map out exactly what will leave the account after the purchase completes.
Where should the buffer be kept?
The money needs to be accessible. For borrowers with an offset account, keeping the emergency fund in the offset can reduce the interest charged on the home loan while keeping the funds available when required. Moneysmart specifically identifies an offset account as one option for holding an emergency fund.
A separate savings account may also be appropriate, particularly where keeping the money separate makes it less tempting to spend. The right option depends on the loan structure, tax considerations and whether the property is owner-occupied or held as an investment.
Be careful about putting every spare dollar directly into a loan where access depends on redraw.
Redraw access and conditions can differ between lenders and products.
Should you borrow less than the bank offers?
Sometimes, yes. Maximum borrowing capacity tells you the upper limit a lender may approve. It does not automatically tell you the right amount to borrow.
There can be a big difference between:
- Being approved for a loan
- Being able to make the repayments
- Being able to make the repayments comfortably
- Being able to make the repayments while still saving and living normally
The last one is usually the position worth aiming for.
Borrowing below your maximum can create room for rate movements, lifestyle costs and future plans. It can also make it easier to hold an investment through periods of vacancy or higher expenses. This does not mean everyone should buy a cheaper property. It means the purchase price should be a conscious decision rather than the automatic result of a lender’s maximum.
Our perspective
Borrowing capacity matters. But holding capacity matters just as much. The goal is not to scrape together every dollar, complete the purchase and hope nothing goes wrong – The goal is to buy with enough room to handle the normal, occasionally expensive reality of owning property.
Before you make an offer, know:
- Your true purchasing costs
- Your expected repayment
- The repayment at a higher rate
- Your essential monthly expenses
- The property’s likely holding costs
- The risks specific to your income
- The amount you want left after settlement
Then work backwards to the appropriate purchase price and loan amount.
A strong lending strategy should help you buy the property without leaving you financially pinned to the wall once you own it.
