Home Loan: How Much Can I Borrow?
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Finding the right home for you can be fun, until you start considering your budget. To avoid wasting time, determine your budget prior to looking at properties so that you understand what you can afford to spend. Our home loan calculator can help you find an approximate number that is appropriate for your financial situation, as well as approximate monthly repayments. And below you can find out more about what banks and lending institutions will look at when determining how much you can borrow for your home loan.
What do banks and other lending institutions look at when calculating your borrowing power?
Annual income
Banks and lending institutions need to know your annual income to estimate what you will be able to repay within the term of the loan. The more you earn, the more quickly you’ll be able to repay the loan, so the larger loan you are likely to get. Generally, the monthly repayments should not be higher than one third of your monthly take-home (net) salary.
Marital status & partner salary
Marital status and partner salary are important for a bank or lending institution to understand because your finances are tied together, and because when your income is combined with your partner’s income, you may be eligible for a larger loan.
Other income
Additional income may also affect the size of the loan for which you are eligible. Usually, one third of your income is the maximum that a home loan payment should be. The higher your income, the higher the loan may be.
Dependents
Children who live in your home or who are attending college or university, as well as spouses or partners who are not co-signing the mortgage are considered dependents. The cost of supporting dependents will affect your borrowing power, because the cost of these additional people will decrease the amount of funding you have available to repay your mortgage.
Monthly expenses
Monthly expenses also deduct from the financial resources that you will have to repay your loan. These include expenses such as food, utility bills, health insurance, petrol or public transport, internet, cable TV, entertainment and so on. While your mortgage may constitute about one third of your salary, if your monthly expenses are too large, you will have less than one third of your salary left over for your mortgage repayments.
Other loan repayments
Other loan repayments you might have, such as car loans, student loans and personal loans, will also eat into your net salary, reducing the sum you have available for mortgage repayments.
Credit card limit, overdraft limit
You may think that having a high credit card limit is a great thing, because it means that you have something to fall back on if you need it, and that you have been deemed financially responsible by your credit card company. However, a mortgage lender will consider what your debt to income ratio might be if you were to max out those credit cards after you have been approved for a mortgage. If your monthly mortgage payments and your credit card payments were to total more than 36 to 40 percent of your income, you may not qualify for the mortgage you want.
Loan term
The loan term is the length of time that you have to pay back the loan, plus interest, in full. The longer you have, the lower your monthly payments will likely be, but generally the more you will pay in interest. A mortgage lender will consider the length of the loan you are looking for compared with the monthly amount that you can afford and the total loan amount you request.
Interest rate
The bank or lending institution makes money based on the interest you pay on your mortgage. You may either have a fixed rate mortgage, or an adjustable rate mortgage. Fixed rate mortgages do not change throughout the term of the loan, while adjustable rate mortgages change every year.
First home or additional property
Whether you are purchasing an additional property, or you are obtaining a mortgage for your first home can affect the mortgage you are likely to be approved for. Your income and expenses can be affected by whether you will have a mortgage for each home, the amount you have paid off for your first home, whether you will be renting out either property and have additional income from it, etc.
Borrowing Power vs. Approval in Principle
Finding out your borrowing power allows you to survey the housing market within your price range. You can find out more about the size of home or suburbs that you can afford to live in. Once you have found a selection of homes that you’re interested in however, you’ll need a letter of ‘Approval in Principle’ in order to make an offer or go to auction.
This is not confirmation of your home loan, but approval from the lending institution that you do qualify for a home loan of a certain figure (subject to their terms and conditions), and it means that your offers or bids will be taken seriously by agents and sellers. Niche Home Loans can take help you through this journey and ensure you have the right paperwork and approvals every step of the way.
How can Niche Living Home Loans help you?
Find out your estimated borrowing power now with our online home loan calculator.
Alternatively, get in touch to arrange a free-of-charge, no-obligation consultation to get a more in-depth overview of your borrowing power and independent advice on where to go from there, including finding the best lender and home loan for your situation and how to bulk up your buying power to get the ‘Approval in Principle’ figure that you need.