When borrowing to purchase a property the amount a lender is willing to loan will depend on the size of your deposit, how much you earn and what you spend.
There can be a difference between what a bank will lend you and what you can afford to pay.
Here’s what to think about before applying for a home loan.
Calculate what you can afford
The first step to considering how much you can afford to borrow is to draw up a budget.
Write down your monthly income and then account for all your expenses.
This will give you a good idea of how much you are already spending each month, and how much you have left over to potentially put towards a mortgage.
When doing a budget, you should always allow for a buffer for unexpected expenses and interest rate changes.
To calculate your borrowing capacity, consider your income, expenses, any personal debt and the appropriate type of loan.
Here are some tips to remember:
– Income: The general rule that commentators follow is that repayments shouldn’t be more than 35% of your gross income.
– Expenses: Make a list of current and future expenses, factoring in things like having children, the financial repercussions of unexpected events such as job loss, and interest rates rising or falling.
– Loan: The loan amount will dictate your monthly mortgage repayments so be wary of overstretching yourself. The bigger your deposit compared to the loan amount, the smaller the repayments will be. Use a home loan calculator to work out how much you will likely be reapaying each month.
Make sure you fit the lending criteria
Lending criteria can vary greatly between banks, and will depend on factors such as the state of the economy and the size of the institution.
Common lending criteria can include:
– A minimum deposit based of the loan-to-value (LVR) of the loan. LVR is the proportion of money you can borrow compared to the value of the property.
– Employment status and current income.
– Previous credit card limits and personal debts.
– Your savings history or previous repayments history for any other loans (i.e. car loan).
If you meet their criteria, the lender will be able to advise you how much you’re able to borrow from them. Then it is up to you to work out if this is manageable with your current income and lifestyle.
Don’t forget about mortgage & lender fees
There are a number of different home loans available and they each come with their own set of fees and charges, including service fees, Lenders Mortgage Insurance and fees for different features.
– Service fees: Each institution will charge differently to cover the cost of servicing the loan. You should always get a legal advisor or conveyancer to review the mortgage contract as they will be able to advise on which fees are standard and which ones you shouldn’t have to pay.
– Lenders’ Mortgage Insurance: LMI is a fee charged by finance lenders when the deposit is less than 20% of the property’s purchase price.
– Special feature fees: Features of different loans can attract more fees or variable interest rates. For example, offset and redrawing accounts could cost more than a standard home loan.
– Associated costs: In order to get a home loan, you will need to reserve some funds for conveyancing, home and contents insurance and stamp duty. It’s important to factor in these costs from the outset.
Speak to a mortgage expert
How much a bank will lend you depends on your individual financial situation.
A financial advisor can assess how your home loan will impact on your overall finances, where as a mortgage broker can help you find the best deal on a home loan.
Date: 15th July 2016
Author: Alice Bradley