How Much Can I Borrow for a Home Loan?
Eager to know about your current home loan borrowing power? Find out the latest here.
Applying for a mortgage is mostly necessary for Australians who plan to own a home. So how much is needed these days to be able to call yourself a homeowner? It can be difficult to tack on an exact amount – there are a lot of factors in play when trying to figure out home loan borrowing power. Let’s dive into how you can figure out your mortgage borrowing power.
What’s Included in Home Loan Expenses?
To get an idea of your borrowing amount, let’s first look at the costs to be considered when applying for a home loan.
Your specific home mortgage is affected by several key factors. If you’re a first-time borrower, you’d want to learn what basic costs and fees are included.
First is the Principal or the amount you borrowed on the mortgage. This refers to the actual loan amount you are asking for. Aside from the principal, there’s also Interest. This is the added charge or percentage your lender puts on the principal loan. The RBA has raised interest rates consistently since the beginning of 2022, so it’s been a huge factor in borrowing capacity for many.
Second would be Upfront Fees relating to mortgage applications include application fees, conveyancing fees, mortgage registration, and others.
There are also Associated Fees in a home loan. For example, package fees per lender product could add different features, like an offset account or a redraw. But these will incur extra charges.
Fourth is Stamp Duty. This is an imposed levy that each Australian state imposes for any given property. The rule of thumb is it will be around 3-4% of the total cost of the property, whether you have a residential home, holiday home, investment property, vacant land, or a farm.
Last basic cost is the Lenders Mortgage Insurance. LMI is another fee you may incur if your deposit is less than 20%. This cost protects your lender in case there is a default on the mortgage. If you can, try to avoid this fee because it can easily pile tens of thousands into the total cost of your home loan.
What Affects Borrowing Power Home Loan?
Borrowing Power is affected by a myriad of factors. Several factors come from you the borrower, and the real estate market itself.
Factors you control include:
Income – Since the mortgage will be a significant part of monthly expenses, lenders will look at your income to determine your ability to make repayments on the loan. The higher your income, the more you may be able to borrow, but income isn’t the only factor. For instance, if your income is high but you have substantial debts, your borrowing power could be lower.
Debts and Expenses – Lenders will want to look at monthly expenses to determine borrowing capacity. If you have a lot of debt or high expenses, this could affect the amount you can borrow.
Dependents – Lenders understand that the financial responsibility of parents to their children will last decades, and they take that into account when determining your borrowing power.
Loan Term – the length of term will calibrate your borrowing power, because generally, the longer the loan term, the more you can borrow but with more interest over time.
Employment History – Lenders would want a stable source of income, so it’s better if you’ve been in the same job for a while and have a steady source of income.
Credit History – Your credit history can also affect how much you can borrow for home loan. A good credit score and timely payments reflect how reliable you are with loans.
Rental Income – If you have existing properties, the income from rentals will also impact how much you can borrow. But, lenders will deduct 20% of the total to factor in the cost of repairs and council rates.
Factors the housing market control include:
Interest Rates – Lenders set their own interest rates, which can vary depending on the RBA’s announced cash rate, market conditions, and the borrower’s financial profile (e.g. retiree? self-employed?) The interest rate on the loan can impact your borrowing power, as higher rates mean higher repayments, which can reduce the amount you can borrow.
Loan-to-value ratio (LVR) – LVR is the ratio of loan amount to the value of the property being purchased. Lenders are more confident to approve loan applications from borrowers with a lower LVR, as this signifies lower risk of problems with repayments.
Credit Policies – Lenders have internal policies regarding credit scores, income requirements, employment stability, and other factors that influence a borrower’s eligibility and borrowing capacity. These policies can vary between lenders,affecting how much they are willing to lend.
Serviceability Assessment – Lenders use serviceability calculators to assess a borrower’s ability to repay the loan based on their income, expenses, and the loan’s interest rate. The lender’s assessment model can influence the loan amount they are willing to approve.
Property Valuation – Lenders rely on property valuations to determine the loan amount. A lower valuation can reduce the maximum loan amount offered.
How Much Can I Borrow for Home Loan?
Typically, the house deposit you should provide is at 20% the total price of the property, but there are some mortgage products that set the deposit lower at 10% or 5%. Of course, the higher the deposit, the better because you eliminate the LMI expense, and you will incur less interest rate charges in the long term. But if you do not have the upfront money for a 20% deposit, you can plan for a more achievable but longer-term mortgage.
In general, the maximum amount an Australian can borrow for a home loan is about 5-6 times the gross annual income. It is essential to note though, that income is just ONE part of the whole list of factors. Expenses, dependents, credit history, and other information help lenders fully assess your borrowing power.
Since we all have different incomes, expenses, and type of home to mortgage, it’s important to calculate what’s the most practical rate for you. Figure out how much you’d be comfortable enough to pay monthly aside from all your expenses like utility, debt repayments, and lifestyle fees. Remember, borrowing the maximum amount can lead to mortgage stress.
Conclusion
Borrowing power is calculated using lender criteria and a client’s financials. Lenders can control the amount a client can borrow for a home loan, while borrowers can compare different lenders and loan products to find the best fit for their current needs.
Ensure that your credit standing, income, savings, and other financially relevant factors are in check to get the best home loan rates from lenders.
Whether you are buying or refinancing, it always pays to seek professional mortgage advice before committing to a specific home loan. Intellichoice has a team of dedicated finance professionals who can help you weigh different rates and options in the market.
