Buying a home
What influences how much I can borrow?
When it comes to how much you can borrow, we want to help make sure that your income is greater than your expenses and that you have a good buffer.
We check that you can afford repayments on your loan over 30 years, with potential interest rate fluctuations.
And we want to make sure you have a little bit left over every month to allow for expenses that come up.
The cushion amount varies between different applicants because it's based on your own lifestyle and everyone is different.
First home buyers should be able to service a loan and have enough money left over every month to live comfortably, because it's important to not live above your means.
So we look at personal expenses – bills, childcare, school fees, car loans and credit cards and the available limit on those cards, as well as interest free facilities like store cards (people often forget about them). And we consider your deposit amount.
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If you’re in the market for a new home, at some point you’ll probably start wondering how much you can afford to spend. It’s a pretty important question, after all.
Figuring out the magic number will let you whittle down your list of potential properties, shaving off the luxury beachside mansions that definitely aren’t in your budget, as well as the “renovator’s delights” that you’d be better off avoiding if you can afford to.
For most buyers, the amount that you can afford to spend will depend on how much you can borrow from a lender. Before you apply for a loan, it’s worth keeping in mind some of the factors that will influence that amount.
If you want to borrow a lot of money—and houses usually cost a lot of money—your lender will want to be confident that you can pay it back. Your income, both from regular employment as well as things like investments, will provide a pretty good indicator of how much you can afford to repay on a regular basis.
If you’re purchasing a home with another person, the lender will take your combined income into account, so your borrowing capacity may be greater.
Your financial commitments
Of course, your income only offers a partial picture of your ability to make repayments. Your financial commitments are also important to consider; you might have a sizable income, but if most of it is already committed to other payments, your capacity to make regular repayments on a home loan could still be considered very low.
Such financial commitments could include things like:
- credit card debt,
- personal loans, and
- car financing.
Your living expenses
Your regular living expenses will be considered alongside your income and ongoing financial commitments, to provide a clearer picture of your capacity to repay a home loan. Your living expenses may include things like:
- school fees,
- utilities, and
If you have gradually saved a large deposit over time (well done!), this demonstrates an ability to regularly put aside a portion of your income. A base of 20% of the value of the property is a good goal to aim towards, so that you can avoid paying Lender’s Mortgage Insurance (LMI). However, it is still possible to purchase a home with less than the recommended 20% deposit.
The details of the loan in which you’re interested can affect the amount that you’re able to borrow. These details include the length of the loan period. Often the longer the loan period (up to a maximum 30 years), the more affordable loan repayments can be.
The value of the property
Your lender will conduct their own property valuation, to determine whether the loan amount for which you’ve applied is reasonable or not.
Your credit history
Your credit score, which is informed by your credit history, plays a pretty big role in determining whether you’ll qualify for a home loan, and how much you can borrow if you do. If you have a spotless history, having spent your life paying bills on time, your credit score will reflect that.
However, there are a few things that can negatively affect your credit score, including the following:
- Making lots of credit applications (credit cards, personal loans, home loans, etc.) in a short period. This creates the impression of financial instability and high lending risk.
- Failing to pay bills or meet loan repayments, or being late in making payment.
- Bankruptcies and insolvencies.
You can find out your own credit score via several different providers, which will give you much greater visibility over your own financial situation and your likelihood of having your desired loan amount approved.
If you find out that you have a negative credit score, don’t stress too much! It’s not all bad news. Incidents will only count against your credit score for a fixed period (which varies depending on the incident), meaning that bad credit scores can be repaired over time. If you make sure that you pay bills on time and avoid missing loan repayments, you can put yourself in a much better borrowing position in future.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs. Where the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should consider the Product Disclosure Statement before making any decision regarding the product. Contact us for a copy.