How much money can I borrow? Six ways lenders decide
Fri Nov 04 03:00:00 AEDT 2016
When you're thinking about investing in property, one of the first questions you will ask your loan provider is “How much can I borrow?”
If you're thinking about investing in property, one of the first questions you will ask when taking out a home loan in Australia is 'how much can I borrow?'.
There are a number of factors that contribute to your borrowing capacity and, as a potential homebuyer, it's important that you know what type of mortgage payments are within your budget. Choice Home Loans breaks down six areas of the loan application that can affect how much you can borrow.
1. Your income and assets
Regular income is key to how much you can borrow for a home loan. As a general rule, your monthly mortgage payment on your home loan should not exceed 30% of your monthly take-home pay. Part-time or overtime income will be viewed more favourably if you can demonstrate consistency over time.
You will generally be able to borrow a larger amount if you have any existing assets that you can offer as security (for example, another property).
2. Your expenses and debts
How much you can borrow is also dependent on your existing financial commitments. When you have existing costs and debt, you have less income to allocate to your home loan repayments, and lenders may consider you to be a high credit risk.
It may be wise to reduce your other loans and expenses before trying to obtain a home loan. If you already have a lot of debt, speak to your mortgage broker about options for debt consolidation.
Debt consolidation could save you thousands of dollars per year, and can sometimes improve valuable credit ratings.
3. Your deposit and savings
The amount of your deposit and your savings history will not only show the lender how serious you are about buying a home, it will affect how much you can borrow for a home loan.
Also, keep in mind that there are typically additional costs associated with a property purchase (stamp duty is usually the big one). Again, your mortgage broker will be able to build these costs into your overall calculations.
4. Your credit history
Your past credit history will play a large role in determining your interest rates, which in turn will affect how much you can borrow for your home loan.
If a lender finds you are at a higher credit risk due to your credit history, you may still qualify for a non-conforming home loan . These typically require you to pay a higher interest rate, which will affect how much you can borrow. It's a good idea to review your credit history with your Choice Home Loans broker.
Most lenders will let you borrow a larger home loan amount if you request a loan term of 25–30 years, compared to a shorter term. However, it’s important to note that you will end up paying more interest in the long run.
6. The loan purpose
The reason you require the loan can affect how much you can borrow.
Property investors, for example, can get rental income and benefits from their investment, which means they may be able to borrow more. Check the interest rates, though, as investment loans can attract higher rates.
Get the right advice
Mortgage lenders consider a large range of different factors when reviewing your mortgage application. It’s helpful to be ahead of the curve where possible, so you can stamp out any potential problems in your financial situation before applying.
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the articles is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).