23 Jul, 2019
Before embarking on your search for your dream home it’s important you know your borrowing capacity. This will give you an indication of what you can afford or give you a reason to crack down on your spending in order to increase your borrowing power.
Borrowing capacity is the sum of money someone is able to borrow from a lender. This amount varies for each individual according to their unique circumstances. On top of this, the amount a consumer can borrow changes with each lender, meaning the same person can have a number of borrowing capacities with different lenders.
Each bank or lender has their own “assessment rate” which is used to calculate a consumer’s borrowing capacity.
Along with an assessment rate, the lender will also consider a number of other factors. This includes your income, rental income, limits on your credit card, the number of dependents you have and your monthly cost of living. By looking to your income and expenses, the lender can determine what kind of repayments will be affordable to you.
Your borrowing power or borrowing capacity is also controlled by a number of other factors meaning a certain salary does not inevitably translate into a certain sum.
This calculator not only requires the value of your income but also your monthly living expenses and other financial commitments. After these deductions are made, you are then left with your monthly disposable income, giving a lender the absolute maximum amount left for a mortgage repayment.
Fittingly, as your income rises you are more likely to be left with more of a disposable income, meaning a larger loan amount is easier to attain. But, if you are a high–income earner with a lot of financial commitments, you still might be left with a low borrowing capacity.
The amount of money you can put towards a mortgage repayment depends on both your salary and your spending. In general, a good rule of thumb is the 28% rule – meaning mortgage repayments should be no more than 28% of your monthly income.
Of course, this rule is only a suggestion, and the amount of money you decide to put towards your mortgage repayments is entirely dependent on your situation. For example, if you are paying off student loans or a car by finance, perhaps you will want to decrease this percentage. The key is to not take on more than you can comfortably handle.
It’s important to remember, every situation is different, and the advice is fairly general and not for specific circumstances. If you’re still uncertain, it may help to use a borrowing calculator or mortgage broker who can tailor this information for your needs.
There are several mortgage products you can use to fund a renovation, each with their own benefits and drawbacks. Be sure to look into each product further to decide if it is the right path for you.
Alternatively, if all else fails you can apply for a personal loan.
It is recommended that a buyer makes a deposit of 20%. By doing this, the borrower avoids paying Lender’s Mortgage Insurance and reduces their chance of paying a higher interest rate due to their low deposit. For a 180k house, the buyer should save $36,000 to offer a 20% deposit.
Someone looking to secure a home loan must prove some stream of income to be able to meet the lending criteria. This individual does not need to be employed but must have some source of funds whether it be Centrelink payments, money from self-employment or a regular deposit into their account from shares or something similar. With no income, a mortgage will not be approved.
There are number of elements which need to be met to qualify for a mortgage. Based on these factors, lenders may or may not allow you to take out a mortgage.
You must be at least 18 to qualify for a home loan, and if you’re over 55 you must provide a written exit plan as lenders are more wary of offering a mortgage.
Lenders will want to know if you are a permanent resident of Australia. If you aren’t there may still be some loopholes for example if you’re married to an Australian resident.
Lenders will want to see evidence of income. Depending on your employment situation, there are several ways you can meet this:
All lenders will want to see proof of what you own. This includes vehicles, shares, property and land. If you’re a business owner, then your businesses goodwill and equipment are assets too.
Lenders want to know if you have existing financial commitments. Debts usually include credit cards, personal loans, store cards and leases.
Lenders will look at your credit score to evaluate your history of making repayments and what this may say about future repayments.
An estimate of your home loan repayments can be calculated based on your interest rate, loan amount and loan term. You will also need to put in your repayment frequency – monthly, fortnightly, weekly – and whether your loan is principal and interest or interest only.
This can be calculated using the eChoice Loan Repayment Calculator which will also provide your estimated total loan repayment and total interest payable.
Self–employed borrowers can qualify for a mortgage by offering their past tax returns as evidence of their income. Most lenders believe they can make an assessment of your stability based on your tax returns. If your income has fluctuated a lot of these two years, this tends to make lenders cautious.
There is no universal method of interpreting these tax returns and have been used in a number of ways. For example:
It doesn’t matter how much you earn or how regular your income is, being self–employed will undoubtedly be seen as a risk to lenders and will come with its own hurdles.
But just like everyone else, how much you can borrow will depend on your income, your financial commitments, your spending and saving. From there you can find out your borrowing capacity.
There are multiple ways a low–income earner can crack into the property market and it’s important to remember ‘income’ encompasses more than just your pay check. Income includes Centrelink payments, child support or any stream of money into your pocket.
A credit score helps a lender know whether or not they should lend you money or give you credit. Your credit score is determined by looking at your credit report, at a point in time, to determine how trustworthy you appear as a borrower. This score includes personal details, as well as past history of borrowing and making repayments. If you have a history of unpaid or overdue repayments this will bring this score down and make it harder for you to secure a competitive mortgage.
Although, you may have a bad score this doesn’t mean a securing a mortgage is impossible. Here’s what you can do:
It doesn’t matter if you’ve been saving for some time or whether you’re just starting, there is an infinite number of ways to save more. Of course, it will mean you’ll need to make a few changes to your spending habits, but this won’t be forever. Once you’re in your home, then you can look at reintroducing some of those luxuries.
Simple ways to save more include:
Want to know more about how you can increase your borrowing capacity or just after some tailored advice on how to secure a mortgage with low borrowing capacity? eChoice has access to hundreds of products across a panel of multiple lenders, so we can help you find a competitive mortgage.
Words by Michelle Elias
An eChoice home loan expert will be in touch with you shortly.