Home loans & Lending: How much can you borrow?
Buying a house is expensive so it’s a good idea to work out whether you can get a large enough home loan to get on the local property ladder in the first place.
Home lending based on your disposable income
There is no firm and fast rules as to how much a home loan provider will lend you based on your income. It’s not as simple as X times your salary.
A mortgage lender will look at your bank statements and your regular outgoings and calculate how much they will lend you. If you run a tight ship with regard to your finances, you may be able to get a bigger mortgage than someone with missed payments and outstanding debts. Conversely, if you’ve large credit card limits and personal loans, you will not get offered as much.
It’s important to note that your credit card limit is what is taken into account in calculating your affordability, not the actual amount owing on your credit card. One way of increasing your maximum level of borrowing is to ask your credit card company to reduce your credit card limit or cancel your cards altogether.
Home Loan: Deposits
The next thing to think about is the deposit you’ll need to buy the house. Usually a mortgage lender will loan you up to 90% of the value of the property which means you’ll have to come with the rest. If you want to buy a house worth $200,000, you’ll need a deposit of $20,000 and so on. Bear in mind that the larger the deposit the wider the range of mortgage lenders willing to lend on your property.
Another thing to consider is that mortgage lender’s ‘hands are tied’ to some degree by Lender’s Mortgage Insurance (LMI). This is a 3rd party company that protects your home lender in the event of having to repossess your property and getting back less than the value of the loan. Since the risk lies with them if you can’t afford to pay your home loan and it’s repossessed they can dictate underwriting criteria to a mortgage lender.
Home loans with less than an 80% LVR don’t have to kowtow to LMI providers and can stretch some of their criteria if they feel you have a good case.
Home loan deposits can come from a variety of sources; however, most lenders look to see that you have managed to save the deposit from your own sources over a period of time, typically looking at your ability to save over the last 6 months (This is typically an LMI provider stipulation). This demonstrates your ability to pay a constant regular amount each month in a similar way to repaying your home loan. For some lenders a lump sum added to your savings within the last 6 months can be a problem, a good mortgage broker will be able to find you the most appropriate lender to your circumstances, don’t just settle for a NO. Note: A lump sum added to your savings over 6 months ago or from a previous property sale aren’t subject to this same scrutiny, so you may find in some cases delaying your home loan application by a month or two is another way of avoiding some of these onerous rules around deposits.
Regardless, there are lenders who will give you a 100% mortgage but you’re likely to pay over the odds on the interest rate because you’re clearly a larger risk. After all, if you default on the home loan, they’ll want to be sure that they can get their money back in full.
The larger the deposit you put down, the lower the rate of interest you are likely to get. A larger deposit also reduces the risk of you going into “negative equity”. This is where the value of your house falls below that of your home loan. This makes it difficult to move house since if you sell up, the proceeds won’t cover the mortgage and you would need to find additional funds.
Another consideration is the various costs associated with buying a home. It’s not just a case of finding the deposit and knowing how much your mortgage payments will be each month. The moment you’ve found the home of your dreams and have had your offer accepted, you’ll find there are all sorts of additional expenses. The least of these is working out how to move your furniture from one place to another.
The main things you need to think about are valuation, survey and legal fees (probably in the region of $1,000 to $1,500), as well as the dreaded stamp duty. These are looked at in more detail within our additional costs section.
So, be aware that in just getting started in buying your own home, you may need to find several thousand dollars for the deposit, fees and stamp duty. The next step is to assess your monthly income and expenditure. Just because someone is prepared to lend you the money, that does not mean you will necessarily be able to afford it!