Interest rates are at historic lows, and with talk of a further cut before the end of the year, I’m hearing from many who are now thinking of either finally getting a foot on the property ladder, or investing in another property. But this thought is always followed by: how much can I borrow?
It’s sensible to determine your borrowing capacity upfront as this provides a guide to the type of property you can buy. Your borrowing capacity is the amount a lender will lend you to buy a property but it’s not as simple as it sounds. There are many factors involved in determining the amount they come up with, but they all serve to prevent people from borrowing more than they can afford to repay.
The loan amount offered can vary between lenders because they rely on a number of factors to calculate it. Some of these are your credit card limits, general living expenses, current assets, income and the type of income it is - for example, if you are a full-time or casual employee, business owner, or contractor - the size of the loan compared to the value of the property, and the number of dependents you have.
Unsecured debts such as personal loans and credit cards can also limit the amount you can borrow. This is because the short repayment terms they have equates to high monthly repayments. Consolidating your debt into one loan, such as a home loan if you have one, can help, although be aware this can extend your debt over the life of your home loan.
Managing your credit cards is a key factor in enhancing your borrowing capacity. Lenders assess your ability to repay a mortgage on the basis that any credit card you own will be fully drawn. If you have a number of credit cards it may be sensible to cancel all but one as lenders view them as a future liability – even if you don’t owe any money on them. Alternatively, if you can’t live with just one, reduce the credit limits on them.
Since the mid 1990s, lenders have to operate under regulatory guidelines designed to encourage responsible lending, and the current National Credit Consumer Protection Act (2009) places a great deal of emphasis on preventing situations in which a borrower could not repay or could only repay a loan with substantial hardship.
This legislation, as well as a lender’s unwillingness to provide funds to borrowers who may be unable to repay the loan, protects you from being offered a loan that you haven’t a hope of repaying. But it is a smart move to take action first to ensure you can make your repayments without getting into trouble.
There are a number of borrowing calculators to be found on lenders’ websites that can help with this such as this one on our site: http://www.imortgage.com.au/borrowing-calculator/
These calculators provide only a rough guide to how much you can borrow but are handy because you can adjust the interest rate payable on the loan to give you an idea of how much extra you’d have to pay if rates rose.
And remember, while being able to optimise your borrowing capacity will give you more options about the type of property you can purchase, once you have bought your property, it doesn’t mean you don’t have to worry anymore.
Once you have a mortgage, make sure you keep on top of all your other living expenses so you know what your financial position is. If rates rise, you may find yourself needing to make cuts to your budget and it’s better to be prepared.
Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.
Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.
A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”
Will is a cricket and football tragic, who also enjoys running.