One of the first questions asked by most people when taking out a home loan is ‘how much can I borrow?’ This fleeting guide will help you determine how much you can provide.
Getting different answers from different home loan lenders?
Home loan lenders use many factors to work out what you can provide to borrow. Each has their own policies, resulting in different answers. Below are some of the meaningful criteria shared to all lenders.
Your income is the meaningful to how much you can borrow. Your home loan lender will look at the amount of income you earn and also the kind and regularity. Part-time earnings or overtime will be viewed more favourably if earned consistently over an extended time.
Your present expenses and debts
When reviewing your ability to repay a loan, home loan lenders want to know that you can also meet your other commitments, including credit cards and personal or car loans.
It may be wise to minimise or reduce your other loans and expenses before seeking home finance.
Also consider asking your lender how your maximum borrowing limit may change if you consolidate any debts with your home loan.
The lower your other loans and expenses, the more income you can allocate to home loan repayments – increasing the amount you can borrow.
What kind of borrower are you?
To gauge what you can provide to pay, mortgage lenders consider the kind of work you do and the number of people connected to your application, including children and any other dependants.
The amount you can borrow changes according to the purpose of your loan.
character investors can often borrow more than owner occupiers with similar criteria – this is because lenders calculate the benefits from negative gearing when doing the calculations.
Location and character kind
character prices do fluctuate and lenders will often limit the amount they will lend in certain areas and character types. It’s wise to contact your lender if you plan to buy in a rare location like the inner city or an outlying regional area – or are considering a character that is ‘non-standard’ in size or construction style.
Interest rate and loan term
The interest rate and loan period affect the amount you can borrow – the higher the interest rate or the shorter the loan period, the higher your repayments. Your home loan lender may use a “factored” rate when doing your calculations. This is the standard rate plus a margin to ensure you can make payments in the event that rates rise.
Your place amount
This is a meaningful factor in calculating the amount you can borrow as it is connected to the loan-to-valuation ratio (LVR). A maximum 95% loan-to-valuation ratio is shared, although 100% home loans, where no place is required, are also obtainable from some lenders.
For a loan set at 95% of a character which is worth $200,000, you will need at the minimum $10,000 before costs. For a character worth $350,000, the minimum place rises to $17,500.
The golden rule
As a rough guide, when taking out a home loan in Australia you can generally borrow between three and four times your total gross income, although it will vary on a case by case basis.
The first step is to acquire a home loan quote from your lender. This will help if you are going to auction or need to figure out how much to save, for your new home.