How much can you borrow for your home loan?
One of the first questions asked by most people when taking out a home loan in Australia is ‘how much can I borrow?’ This brief guide will help determine how much you can afford.
Getting different answers from different home loan lenders?
In Australia, home loan lenders use many factors to work out what you can afford to borrow. Each has their own policies, resulting in different answers. Below are some of the key criteria common to all lenders.
Your income is the key to how much you can borrow. Your home loan lender will look at the amount of income you earn but also the type and regularity. Part-time earnings or overtime will be viewed more favourably if earned consistently over an extended time.
Your present expenses and debts
When reviewing your ability to repay a loan, home loan lenders in Australia want to know that you can also meet your other commitments, including credit cards and personal or car loans. It may be wise to minimise or reduce your other loans and expenses before seeking home finance.
Also consider asking your lender how your maximum borrowing limit may change if you consolidate any debts with your home loan. The lower your other loans and expenses, the more income you can allocate to home loan repayments – increasing the amount you can borrow.
What type of borrower are you?
To gauge what you can afford to pay, mortgage lenders consider the kind of work you do and the number of people linked to your application, including children and any other dependants.
The amount you can borrow changes according to the purpose of your loan. Property investors taking out a home loan in Australia can often borrow more than owner occupiers with similar criteria – this is because lenders calculate the benefits from negative gearing when doing the calculations.If you are borrowing for business or any other non-residential purpose you may not be able to borrow up to the highest scale offered by your lender.
Location and property type
Property prices do fluctuate and lenders will often limit the amount they will lend in certain areas and property types. It’s wise to contact your lender if you plan to buy in a unique location like the inner city or an outlying regional area — or are considering a property that is ‘non-standard’ in size or construction style.
Interest rate and loan term
The interest rate and loan period affect the amount you can borrow – the higher the interest rate or the shorter the loan period, the higher your repayments. Your home loan lender may use a “factored” rate when doing your calculations. This is the standard rate plus a margin to ensure you can make payments in the event that rates rise.
Your deposit amount
This is a key factor in determining the amount you can borrow as it is linked to the loan-to-valuation ratio (LVR). For home loans in Australia, a maximum 95% loan-to-valuation ratio is common.
For a loan set at 95% of a property which is worth $200,000, you will need at least $10,000 before costs. For a property worth $350,000, the minimum deposit rises to $17,500.
The golden rule
As a rough guide, when taking out a home loan in Australia you can generally borrow between three and four times your total gross income, although it will vary on a case by case basis. The first step is to obtain a home loan quote from your lender. This will help if you are going to auction or need to figure out how much to save, for your new home.