How much can you borrow?
It might be stating the bleeding obvious but the most important thing to do, before you start house hunting, is work out exactly how much you have to spend and how much you can afford to borrow.
That means taking a good look at your income, financial commitments and savings. It also means getting pre-approval on a home loan.
The amount you can borrow depends on:
Unsurprisingly, your income is the most important factor determining the amount you can afford to borrow. It needs to comfortably cover the repayments on your loan. Most experts say “comfortably” means repayments are no more than 30% of your gross salary.
You should also take into account other general home owner costs like repairs, council rates, insurance and strata fees.
When you combine these home owner bills with your repayments, the annual amount should not exceed more than 40% of your gross salary.
Your financial commitments
As well as your income, lenders will look at your current financial commitments to calculate what you can afford to pay. They’ll take into account things like credit card and HECS debt.
Your deposit and savings
If you’re buying your first home, you’ll need to have some savings to use as a deposit. At least 10% of the cost of the property you want to buy is a start, but to avoid Lenders Mortgage Insurance (LMI) you’ll need a deposit worth over 20%.
A good savings history will also help you get a loan, but it’s not essential. Lenders are interested in your ability to pay the loan now and in the future, rather than what you earned and spent in the past. If you’ve already got a home and a mortgage, a savings history is not important.
Be prepared for:
Possible rate rises
You should be prepared for interest rates rises when you estimate how much you can afford to borrow—even if you don’t get a variable loan. Most lenders will calculate a possible interest rate rise of up to 2% above the current official rate when deciding how much you can borrow.
If you can, pay that extra 2% anyway. Then you’ll hardly feel it if interest rates rise. If they don’t go up, you’ll have cut years and thousands of dollars off your loan.
Extra costs that come with a property purchase
Initial costs that you need to budget for when buying a home include loan application fees, building inspection fees, Lenders Mortgage Insurance, stamp duty, conveyancing fees and more.
For a run-down on the additional expenses you may have to pay, go to extra costs.
Don't guess what you can afford!
Get pre-approval on your loan
Don’t make the mistake of only using a few online calculators to guesstimate the amount you can borrow. We’ve seen too many people lose a deposit because they’ve exchanged at an auction and then found out they couldn’t get a loan to cover the cost of the property.
Get pre-approval before you start the home hunt. You’ll save loads of time and stress.
If you haven't got quite enough:
Don’t over-stretch yourself
You might think that you can afford to spend more than 40% of your gross salary on your home every year, but you’re unlikely to convince a lender. Even if you think you can live on baked beans and commercial television for the next ten years—most lenders won’t agree. They know everyone wants some Thai takeaway, a good movie and a big night out every now and then.
Boost your savings
A few tweaks to your spending here and there can make a big difference to your savings.
- Use our budget planner so you know exactly what you spend your money on, and where you can make some changes.
- Set up automatic payments into a high interest savings account—see how much you could save with our savings calculator.
- If it’s your first home, take a look at a 'first home saver' account. With one of these accounts, the Federal Government will contribute 17% of what you put into the account every year up to $1,020 with valuable tax breaks on interest, too! See how your deposit can grow with our first home saver calculator.
The best time to see a broker?
A mortgage broker can help you to better understand your borrowing capacity before you start house hunting and, importantly, will help to ensure your finances are sorted when you find your dream home. The earlier you meet with a broker, the more informed you’ll be upfront.
It’s a good idea to make an appointment when you initially start thinking about buying a home.
Continue to information about the extra costs when buying a property.