Living the dream has a different meaning for every Australian. For some, it’s about having the freedom to choose their own way of life. Meanwhile, 41 percent of Australians have their eyes set on the more tangible goal of owning their home, says the Financial Planners Association.
— AMP (@AMP_AU) August 23, 2017
No matter your greatest objective, having the ability to access extra funds when needed can be the difference between success and stagnation. But lenders will limit the amount of money they’re willing to grant you based on what’s called your borrowing power. This is determined by a number of different of factors.
Seeking a raise or cutting unnecessary expenses can help to increase your borrowing power, however, it’s important to remember that for each dependent in your life, your serviceability decreases. This is simply because with dependents in your household, you have greater expenses and thus your available income for making repayments is less.
Most lenders will use the Household Expenditure Method (HEM) to determine your living costs. This takes account spending on over 600 common expenses identified by the Australian Bureau of Statistics. For example, finder.com.au claims that a married couple without kids saves $22,998 more in living costs each year than those with three children.
Outstanding debts and credit cards can also count towards your expenses. Cards will be assumed to be maxed out regardless of existing balance. Settle your current debts and cancel your cards before applying for a loan.
Job security is vital when seeking a loan. Most lenders will consider you to be high-risk if you are self-employed, a contractor or casual employee. You’ll likely also need to have passed a probation period or working for a company for a certain amount of time before lenders will grant your loan.
Missed bills and credit card repayments can work to lower your credit score.
Being able to prove you can be trusted to service your loan will go a long way. Missed bills and credit card repayments can work to lower your credit score. Before applying for a loan, acquire your credit history from a credit reporting body and address any red flags possible.
Your lender will respond to your loan request based on your projected ability to meet monthly repayments, so a longer term is more likely to be approved.
At an interest rate of 3.99 percent, a $500,000 loan with a 30-year term can ultimately cost a total of $861,910, when $2,394 is paid each month, according to MoneySmart’s mortgage repayment calculator. Meanwhile, the same loan over a 20-year term may cost only $728,944 but require monthly payments of $3,037.
A 20 percent deposit is recommended to avoid paying extra fees like lender’s mortgage insurance.
Your loan to value ratio (LVR) will help determine how risky your loan is to the lender. This is calculated by dividing the loan amount by the property value and multiplying that by 100 to express as a percentage.
If you have a $100,000 deposit and wish to buy a home valued at $700,000, you’ll need to borrow $600,000. So, your LVR is 85.7 percent. Because this is fairly high, a lender may worry that you won’t be able to make repayments. The maximum LVR you can apply with will depend on your serviceability but 80 percent, or a 20 percent deposit, is recommended to avoid paying extra fees like lender’s mortgage insurance.
Some banks may require as much as 30 percent of the total value as a deposit on homes in certain postcodes. Often these restrictions apply to more affordable but less populated small towns.
For example, Western Australia’s Port Hedland was blacklisted by NAB in 2016. With a median house price of $373,000 (according to CoreLogic), you’d need a deposit of around $111,900 to qualify for a home loan.
Meanwhile, Forcett in Tasmania has a similar average house price at $360,000 but is not considered risky due to its high growth rate – meaning first home buyers could only need to save as little as $36,000 (10 percent) before applying for a loan.
Just because you can borrow a certain amount, doesn’t mean you should. Putting down a larger deposit and borrowing less towards your home might limit what’s in your bank account today, but could help you save on interest.
When budgeting for your first home purchase, consider the extra costs associated with homeownership such a maintenance, stamp duty and council rates. Ensure you have plenty of room for spikes in interest rates with a variable loan, or following the end of a fixed-rate period, as well as other costs.
— AMP (@AMP_AU) December 15, 2015
AMP claims mortgages make up over 50 percent of Australian household debt. If you’re thinking about purchasing your first home, take a moment to consider if that really fits into your life plan. Travel and holiday costs aren’t included in HEM estimates, meaning that while you have a mortgage, you could be limited in your ability to see the world. Meanwhile, a mortgage may make it hard for you to finance other things like your dream car.
Remember to take account of all of your goals when financial planning for the future – don’t let mortgage debt get in the way of your aspirations.