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It’s handy to know where you stand financially before you start searching for a property. But you won’t need to go through an entire application process to get an indication of what you can borrow based on your income.
The general rule for home loan affordability
The general rule for making sure you can afford your home loan is keeping it to a maximum of 30% of your gross (pre-tax) income. Any more than this, and you increase the risk of experiencing mortgage stress. It’s not a hard and fast rule because those with higher incomes may have the capacity to spend more than 30% and still meet their living expenses, but it’s a good place to start.
What is mortgage stress?
Although lenders want to make sure you have the capacity to make your monthly repayments each month, there’s also another reason for their stringent application assessment. It is their responsibility to ensure that not only can you afford to repay the debt but also that the new loan won’t be responsible for placing you in undue financial stress. Most lenders will include a buffer in their calculations to ensure you can still meet repayments comfortably if interest rates rise.
Get it right from the start with professional help.
Is it only income that affects my borrowing power?
Income is just the first part of the equation. Serviceability calculations also include financial commitments and living expenses to determine what’s leftover to meet the proposed home loan repayments.
Existing financial commitments
Personal loans, credit cards and even HECs debts may affect your borrowing capacity. And don’t forget long-term contracts such as lines of credit you’ve taken out for household items like furniture. A lender will always look at the limit of these accounts, not just what you owe.
Lenders historically used generic values for living expenses, depending on how many adults and dependents were reliant on the application’s income. In recent years, they have started scrutinising expenses and expecting applicants to estimate actual living expenses. These could include groceries, fuel, childcare fees, gym memberships and tv streaming services. Any money that you pay out regularly should be included. Living expenses can vary considerably between households.
How to find a property within your means
Understanding your financial situation and knowing how much you can borrow will help you focus your search on properties that fit within your budget. Chat to a mortgage broker before you start looking to get an indication of how much you can borrow. Or go one step further and get a pre-approval in place so you can move quickly once you find the home.
- Useful reading: A guide to mortgage pre-approval
What if you can’t afford the property you want?
There are still options if your borrowing capacity isn’t as much as you’d like. Consider finding a home that fits within your budget but can be used as a stepping stone. Get on the property ladder, build equity, and then buy your forever home a few years down the track.
What if it seems too much?
In some circumstances, a bank or lender may say you can borrow an amount that might feel uncomfortably high. You do not need to borrow the full amount. Understanding your finances and what you’re comfortable with is necessary if you want to take on a commitment like a house. Remember that borrowing power calculations will only consider your circumstances right now. If you’ve got plans to start a family, take some time off or do something that may change your financial situation – this should guide your decision about how much you should borrow.
Get some help
Lenders use different assessment values and interest rate buffers in their calculations, so you may find the amount you can borrow varies between lenders. Yellow Brick Road mortgage brokers have access to a wide range of lenders and will help you find a lender that suits your needs and income.