Borrowing Power Tips
How Much Can I Borrow For a Mortgage?
It’s important to know how much you can borrow in order to help determine what type of abode you should be looking for. By knowing what your borrowing power is in advance it can determine where you live or what you should be living. If you wanted a house in a certain area, but don’t have the borrowing capacity for one, you might have to settle for a townhouse, or an apartment might be a less expensive compromise.
An important first step is to get a loan preapproval so you know what your borrowing capacity is going to be prior to committing to a property purchase. Otherwise it could mean losing any deposit already paid if you can’t get the loan amount required to make that purchase.
What is Your Debt Profile Like?
If you’re looking to maximise your borrowing capacity you should try and to reduce as much existing debt as possible (such as car repayments, credit card limits and any other personal loans) as this will increase your borrowing capacity for a home loan.
Another benefit to reducing existing debt will also help make it easier for you to make your new mortgage repayments on time as there will be fewer demands on your cash flow. Keep in mind when you buy a property there will be added expenses that you didn’t have when you were a renter. These could include insurances, council rates, water rates and maintenance costs.
As different lenders have different borrowing capacity ratios, it’s a good idea seek out a mortgage broker. Mortgage brokers have access to many lenders to find out what your maximum borrowing capacity will be.
The amount of taxable income you earn is the major key to how much you can borrow. Your chosen lender is going to look at how much you earn and also the type and regularity of the income. Overtime, bonus and rental/investment income is only assessed at 80% of its full value.
What Type of Borrower Profile do You Have?
To measure what you can afford to pay, home loan lenders consider the kind of work you do (PAYE, casual, self employed etc.) and the number of people linked to your application, including dependants.
The amount you want to borrow can change according to the loan purpose.
In today’s market property investors can often times borrow less than a owner occupier purchaser with the same financial profile – because a lot of mortgage lenders are charging higher rates for investment property loans and reducing the loan to value ratio on the loans they will provide.
Location and property type
Some lenders can limit the amount they will lend or decline to lend at all in certain areas and with certain property types. It’s smart to contact your lender beforehand if you’re planning to purchase in locations like the inner city or any outlying regional areas. Also, any properties that are ‘non-standard’ in size like small apartments or studio apartments.
Loan Term and Interest Rate
The loan term period and the interest percentage rate can affect how much you can borrow – the higher the interest rate or the shorter the loan period, the higher your repayments. These day’s lenders use a “factored” rate or padded rate when calculating your borrowing capacity. This is the rate you will actually pay and then they add a margin to ensure you can afford to make the repayments in the event that interest rates rise into the future.
How Much Deposit do You Have?
This is usually a key factor in determining your borrowing power as it is linked to the loan-to-valuation ratio (LVR). The higher the percentage of your loan is to the value of the property you are buying the higher the risk is to the lender. Therefore, the lender will seek to reduce their risk by reducing the amount you can borrow.
The Best Rule
The first step is to take all of the hard work out of the exercise and seek out a professional mortgage broker. There services are free and they will save you a lot of time and money.