A common question we get from borrowers is “how much can I borrow?”. If this is you, then read on.
The answer to this question depends on various factors, including your income, expenses, credit history, and the lending policies of the lenders at that point in time. It will also depend on whether you purchasing a property to live in or for investment purposes, as rental income and other add-backs can have an impact on how much you can borrow.
1. Assess Your Financial Situation
Before applying for a mortgage, it’s essential to take a close look at your financial situation. Your broker will ask you for your income, details of your expenses, and information on any existing debts/liabilities. This process includes:
a. Income: Your regular income, including your salary, bonuses, commissions and any other sources of income, is an important factor. Lenders consider this when determining how much you can borrow.
b. Expenses: Take a detailed inventory of your monthly expenses, including utilities, groceries, insurance, and other financial obligations.
c. Existing Debts: Lenders also consider your existing debts (and sometimes debt-to-income ratio), such as credit card limits, personal loans, HECS, and car loans, when you ask how much can I borrow.
d. The Loan-to-Value Ratio (LVR)
In Australia, one of the primary factors that determine how much you can borrow is the Loan-to-Value Ratio (LVR). LVR is the ratio of the loan amount to the property’s value. In general, the lower the LVR, the more favourable the terms you can secure. To avoid paying Lenders Mortgage Insurance (LMI) you’ll need a deposit of 20%. If you haven’t got that much and want to purchase anyway, there are options available to you.
Some lenders may accept a lower deposit with Lenders Mortgage Insurance (LMI), which is an insurance policy that protects the lender in case the borrower defaults on the loan. LMI can add to the cost of the loan. Our brokers can help you to understand what these extra costs might look like, as over a 30 year loan term this is usually quite minimal in terms of the impact on loan repayments.
2. How much can I borrow?
Many Australian lenders and brokers offer online borrowing power calculators that can help estimate how much you can borrow based on your income and expenses. These calculators can provide a rough idea of your borrowing capacity, but keep in mind that they are just starting points. To get an accurate assessment, it’s recommended to consult with a broker – the reason being the online calculators don’t take into account your full situation. Borrowing power can change across each of the banks depending on their credit policy, your personal situation and the loan amount you require.
3. Credit History
Your credit history plays a critical role in the mortgage approval process. Lenders use your credit score and history to assess your creditworthiness. A good credit score can help you qualify for a larger loan amount and secure more favourable interest rates. Make sure to review your credit report and address any issues before applying for a mortgage.
4. Employment Stability
Lenders also consider your employment history and stability. A consistent job with a steady income is viewed favorably by lenders. Self-employed individuals may need to provide additional documentation to prove their income, business profitability and trajectory.
5. Interest Rates and Loan Terms
Interest rates and loan terms will impact how much you can borrow and the overall cost of your mortgage. As interest rates fluctuate, they can influence your monthly repayments. Choosing between a fixed-rate and variable-rate mortgage will also affect your borrowing capacity.
6. Seek Professional Advice
Navigating the Australian mortgage market can be complex, and lending policies can change. To get a clear understanding of how much you can borrow for a mortgage, it’s advisable to consult with a mortgage broker (like us!). We have up-to-date knowledge of the lending market and can help you find the best mortgage product to suit your needs. Our brokers are also great at helping you work out which lender is going to be suit your circumstances, particularly if there is some complexity to your situation.
Securing a mortgage in Australia requires careful consideration of your financial situation, LVR, credit history, and other factors. By assessing your financial situation, understanding the importance of the LVR, and seeking professional advice, you can determine how much you can borrow for a mortgage. With this knowledge, you can make informed decisions and take significant steps toward your dream of homeownership. Remember that mortgage lending policies can change, so staying informed and regularly reviewing your financial situation is essential in your journey to homeownership.