When you have set your eyes on a dream home, you can already visualise what it would be like to live there: have friends round to dinner, play with the children in the backyard or enjoy the view from the terrace, glass in hand, on a balmy summer's evening.
Whatever it is that makes the property click for you, you'll be tempted to do anything to own it and live your dream. Odds are that this will stretch you financially.
Ultimately, it will all boil down to how lenders will assess your home loan application — lenders have criteria they work with that allow them to assess each case on an individual basis. Here’s what you need to know about your limits and lender criteria:
- What factors affect your borrowing limit?
- What criteria do lenders use?
- What are the things to consider before applying for a home loan?
- How do you increase your borrowing power?
What factors affect your borrowing limit?
Banks and financial institutions lend you the money to buy a property based on your ability to meet repayments. They will usually take into account your income, outgoings, and other details such as the number of dependents you may have.
It is difficult to give a general assessment of exactly how much you will get from lenders because each one will come up with a different amount, depending on whether you have a deposit, what sort of interest rate or loan you are taking out, and your age.
Your Mortgage’s Borrowing Power Calculator can provide you with an initial estimate of what a lender may be willing to lend you based on your income and expenditure.
What criteria do lenders use?
Lenders generally have their own criteria when it comes to deciding how much to lend, but there are always a few rules of thumb that apply across the board.
Here are the five lending considerations that most lenders use:
- The reference rate is always above the standard rates to ensure the client has a buffer
- Lenders look at the applicant’s assets and liabilities
- The number of adults living in the house will also be considered
- The number of dependent children will also be taken into account
- Lenders will conduct a serviceability calculation which accounts for rate rises and the client's ability to service the debt comfortably
What are the things you need to consider before signing up for a home loan?
Now that you have a more certain idea of how lenders will assess your loan, it is now time for you to do your own assessment of your financial health.
Here are 10 questions you need to ask yourself before you apply for a home loan:
- Is your industry stable?
- Is your job stable/how easy is it to find similarly paid employment?
- What percentage of your income will be spent on the loan?
- Are you factoring bonuses and commission into the equation?
- Will you have children?
- If you have a joint income, is your partner likely to take time off to look after children?
- Have you factored in the cost of rates, insurance and maintenance?
- Will you send your children to a private school/university?
- How important is your current lifestyle to you?
- Could you change your lifestyle in order to repay a big mortgage?
How do you increase your borrowing power?
It's one thing getting access to a loan to buy that dream home, but another to be able to afford the repayments. One of the biggest things to remember is not to take an estimation of affordability from online calculators and from broker assessments at face value.
Many lenders and mortgage experts believe that monthly mortgage repayments should not exceed 28% of your gross household income.
If calculations tell you that you will be spending 30% of your pre-tax monthly income on a mortgage, then there is a high risk for you to be under mortgage stress.
Also read: Fortnightly vs monthly repayments
There are several ways how to increase your borrowing power and it starts with saving up a bigger deposit.
The higher your deposit is, the bigger your borrowing capacity is going to be as it could serve as evidence of your consistency in saving.
Furthermore, a larger deposit will lower the principal amount of the loan and reduces your monthly repayments and interest.
Another thing you need to do to increase your borrowing power and ensure that you will not be overstretching yourself is to pay off your existing debts first.
Personal loans and credit cards often have high interest rates, and these could have a huge impact on how much your lender will be willing to lend you.
If you are able to show your lender that you can pay your debts in full regularly, then you may be able to snag a better home loan deal.
Reducing your spending is also going to be a crucial step to avoid overstretching your finances. Budget planning will go a long way when you are looking to apply for a home loan.
You can cut back on some of the unnecessary expenses — little things such as reducing the number of times per week you eat out, making your own coffee, and changing your phone plan can contribute to your savings.
If possible, you can also find ways to increase your income. You can either take on extra shifts at work, negotiate for a pay raise, or look for a secondary job that you can do in your free time.
All of these things can help boost your borrowing power and help you plan your budget before you get a home loan, to calculate your home loan repayments, you can use our mortgage repayment calculator.