TIP This is a question worth asking early in your First Home Buying journey as it establishes several parameters for what you want to achieve! The internet is full of borrowing capacity calculators which will give you some indication, however a more accurate and reliable source will always be your Mortgage Broker or a bank. In assessing how much you can borrow the lender considers your income, savings, expenses, other loans, credit card debt, credit card, spending history and assets.
Most lenders have policies as to the percentage of the purchase price that they will lend you. This number varies by lender but as a guide, most lenders will lend money up to 80% of the purchase price. Where you need to borrow more than the banks ideal lending ratio, the lender will generally require you to take up a Lenders Mortgage Insurance also known as LMI. The workings of LMI are outlined separately.
TIP Knowing how much you can borrow is certainly helpful and relevant, however depending on your situation, understanding how much you SHOULD borrow, is a fundamental question to ask yourself! Over time, there have been many examples of individuals who have borrowed above their practical capacity, only to find themselves in trouble the minute market dynamics change. The Royal Commission into Banking in 2018, revealed many examples of Australians, who found themselves exposed to repossession and at times lost everything in the process.
Interest rates change and there is always a risk that rates could increase. When considering the amount of money you should borrow, it is necessary to accurately calculate how much you have available each month for loan repayments. Depending on each individual, you can calculate repayment capacity based on present interest rates and you can also factor in some margin for potential increases. A good practice is to setup an excel spreadsheet and do what if scenarios using a rate up to 4% higher than market so that you understand the likely impact every time rates increase by .5%. Many may not remember, but in the mid 80’s interest rates rose above 15% and for a period higher than 18% as shown on the graph. Whilst this level of interest is unforeseeable in the future, every borrower needs to consider the possibility that rates may increase, as such you need to always be prepared. A good Mortgage Broker is generally happy to assist you calculate scenarios specifically for you.
Another factor for consideration is job security. To manage your risk, it is a good idea to factor the possibility that you or your partner could be out of a job for 3 to 6 months, during the duration of your loan.
TIP There are possible strategies for protecting yourself against situations which are either unforeseen or out of your control. One option you may consider, if your loan allows it, is to make extra repayments on your loan whenever possible. This can be in a lump sum, or by increasing the frequency of your repayments. Being in a position where you are 5 to 6 months ahead of your repayments, can be a protection mechanism and put your mind at ease. It also results paying less interest over the term of your loan and paying down your debt sooner.
If your loan prevents you from making additional payments, consider setting up an Offset Account and place extra payments into this account, specifically to protect you for unforeseen changes in your life.
Whilst these are guidelines you can use, the best way to establish how much you can borrow is to meet with your Mortgage Broker and they will discuss your maximum borrowing capacity. This will guide you in terms of a purchase price that you can target for your new home.
Remember your maximum borrowing capacity is not necessarily your best borrowing capacity. Consider all factors especially how much you can afford to repay before making your final decision. Brisbane Home Loans Mortgage Broker Specialists can assist you.