How much can I borrow?
Thinking about buying your first home? Perhaps it’s an investment property? No matter the type of buyer you are, if the Australian property market is calling your name but you’re unsure of your borrowing power, this guide is here to help.
After all, without knowing how much you can borrow, you won’t know what to budget for!
We’ll run you through all the important factors to consider including: LVR, home loan repayments, stamp duty, additional borrowing costs and we’ll even throw in some handy tips to help you increase your borrowing power. But first, let’s jump straight into calculating how much you can borrow.
Calculating how much you can borrow
Put simply, the amount you’ll be able to borrow will be determined by your financial situation. That means on one side your income, plus that of a partner (if there’s two of you applying), as well as any assets will be weighed up against your expenses and any debt you have on the other side. The difference between the two basically gives your lender a picture of what you’re able to pay back comfortably.
Ali earns $80,000 a year and her husband Josh earns $70,000, making their combined income $150,000. They also have no dependents and their living expenses come out at $4,000/month.
Taking those figures into account, and assuming the loan that they take out will be paid off over 25 years and that the interest rate they’ll get is 3.35% (currently the average in our database), the couple could afford to borrow $1,136,046.
Just keep in mind that the borrowing figure provided a rough estimate, not a guarantee.
Work out your loan to value ratio (LVR)
Before you think “woohoo that waterfront property is mine!” we should explain that there is a difference between how much you can afford to borrow and how much a bank will lend you. Financial providers use a term called loan to value ratio (LVR) to determine whether they will approve you for the home loan.
In Australia, banks prefer to lend to borrowers with an LVR of less than 80% (e.g a deposit of 20% or more). This is because it shows the lender you’re able to save and you will be deemed less likely to default on the loan. Borrowers who can’t meet this 80% LVR threshold will typically be required to pay lenders mortgage insurance (but more on this later).
Ali and Josh have worked hard to save up a deposit of $100,000 and are looking to purchase a property worth $500,000. That means their deposit would be 20% of the property value and, as a result, that their LVR is 80%. So in this situation they wouldn’t have to pay lenders mortgage insurance.
That’s not to say it’s impossible to get a loan without a 20% deposit, because a number of lenders do provide low deposit home loans with LVRs as high as 95%.
The First Home Loan Deposit Scheme (FHLDS) is also giving more buyers with low deposits the opportunity to enter the market. Under the scheme, eligible first-time borrowers can take out a home loan with a deposit of 5% without having to pay lenders mortgage insurance because the Federal Government acts as a guarantor for that 15% gap.
Work out your home loan repayments
It’s one thing to ask “how much I can borrow?” but another thing to actually repay the loan. There’s no hard and fast rule on how much you should borrow, but one general theory is that your home loan repayments shouldn’t exceed 35% of your gross income.
If Ali and Josh decide to go ahead and purchase that $500,000 property with a $100,000 deposit, a home loan with a 3.35% interest rate over 25 years will mean their monthly repayments will be $1,970.
However, if the couple were financially savvy and compared home loans to find a lower rate, say 2.50%, this would bring their monthly repayments down to $1,794 and save them $52,798 in interest over the life of the loan.
Since their current rent is $2,400 a month and they will be living in the property they purchase, Jane and Tom should comfortably be able to afford the repayments of the lower rate loan.
But wait, what about a rate rise? Given that interest rates are currently sitting at historically low levels, there’s always the possibility that they’ll increase over time. Our rate change calculator can show you how much extra you’d need to budget for in terms of monthly repayments based on a number of different rate increases.
While you’re thinking about how much you want to borrow, you’ll also want to consider the cost of stamp duty which is a tax charged by state and territory governments. Depending on the price of the property you’re looking to purchase, and the type of buyer you are, stamp duty can be pricey – easily reaching into the tens of thousands.
Additional borrowing costs
Once you have an idea of how much you can afford to borrow, don’t forget to factor in all the extra costs of purchasing a property into your budget.
- Mortgage establishment fees: When you apply for a home loan, you may be charged a number of upfront fees that can cost anywhere between $0 and $1,500.
- Ongoing home loan fees: You may also be charged a yearly fee for the provider servicing your loan, however, this generally isn’t higher than $400. Often providers will waive this fee altogether for refinancers.
- Conveyancer fees: To get your conveyancer or solicitor to look over the contract, you will be charged a fee of around $2,000.
- Pest and building inspection fees: Don’t want a house with termites? Don’t forget to get pest and building inspection done that will alert you of any critters, as well as any structural problems with the property.
- Lenders mortgage insurance: As mentioned above, if your deposit is less than 20% (80%> LVR) you may be charged lenders mortgage insurance which isn’t cheap – it could cost you thousands. Keep in mind this isn’t a protection for you but instead protects the lender if you default on the loan. Luckily for those eager to get into the market, like stamp duty costs, you can also add this to your home loan amount.
- Income protection insurance: While you may be able to comfortably afford your repayments, if you were to become ill you would need income protection insurance to cover the repayment costs while you are unable to work.
- Home and contents insurance: Also make sure you protect the items in your home, as well as the property itself with home and contents insurance.
- Landlords insurance: If you’re purchasing an investment property and plan to have tenants, landlord insurance will give you the peace of mind against any mishaps that may occur, like damage to your property or rental loss.
Ways to increase your borrowing power
Whether you’ve been rejected before by a lender, or you’re preparing to apply for your first home loan, there’s no harm in reflecting on your finances so you can put yourself in the strongest position possible. Here are some tips to help increase your borrowing power:
- Trim your expenses: It’s not a myth that lenders will take into account your expenses (even things like Uber Eats and Afterpay purchases) when they’re assessing your ability to service the loan, so before you apply it may be worth tightening your belt and reviewing any unnecessary spending.
- Pay off debt: Being knocked back for a home loan can be disheartening but thankfully getting on top of your debt and paying off any owing balances will help you get back on track and closer to your dream of home ownership.
- Get a copy of your credit report: Before you apply for a mortgage make sure all the details on your credit report are correct, as any mistakes could hinder your chances of being approved for a loan. Find out how you can get a free copy of your credit report here.
- Get saving: Make sure you’re putting aside money each month into a high interest savings account, as the lender will check your bank and savings account statements to determine whether they will lend to you.
Source: Tom Watson
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