- Income Stability Matters: Lenders scrutinise your income to ensure you can manage mortgage payments. A stable income stream increases your approval chances.
- Assets Boost Appeal: Owning assets like cars, properties, and shares demonstrates financial acumen, making you an attractive borrower.
- Debts and Expenses Impact: Lenders assess existing debts and monthly expenses like rent and bills to gauge your repayment ability. Managing these wisely is crucial.
So… you’ve made the decision to say ‘byeeee’ to your landlord or house mates and now you have your sights set on owning your own home. The first and probably the most important step to buying your own home is knowing how much you can borrow. Your borrowing power is determined by criteria designed to assess whether you can meet your home loan repayments. Below are the most common factors that banks and other lenders will consider when determining how much you can borrow.
Income – First things first
Your income is one of the first and most important criteria lenders will look at. Lenders want to know if you can comfortably handle those monthly mortgage payments. But it’s not just about the numbers; lenders also look at how secure your income is or if there are any potential future risks. Are you in a stable job? Or are you embarking on a risky self-employment venture? Soz, but selling items on marketplace for a living doesn’t count. The more stable your income, the more likely you are to get a nod of approval.
Assets – Demonstrating financial strength
Assets like cars, properties, and shares are like trophies that demonstrate your financial prowess. They indicate that you’re good at saving, paying off loans and investing wisely, making you a more appealing borrower.
Debts & expenses – keeping a balanced diet
Lenders want to make sure you won’t be drowning in debt once that mortgage kicks in. They consider your existing debts, such as personal loans, credit cards, and even that Afterpay splurge you had last month. Your living expenses also come into play – rent, groceries, utility bills, streaming subscriptions – everything that makes up your monthly budget.
Some of the most common debt types include:
- Personal loans (incl motor vehicles)
- Credit cards
- Afterpay and other “Buy Now Pay Later” services
- Existing mortgages
- Portfolio loans, or loans that provide the funds you need to buy shares and other investments
- Tax debt
Credit Score – Your financial report card
Your credit score is a number based on your credit report, it’s based on your borrowing history – did you pay your debts on time or default on loans?
Your credit score will be between zero to 1,000 or 1,200. The higher your score, the more reliable you will look to lenders. A score of at least 670 and above is considered good.
Property Value – Market realities
Sometimes what you think a property is worth might not match up with what it’s actually worth in the market. To determine a home’s true value, lenders may conduct a property valuation. The outcome may impact whether or not you are approved to borrow a certain amount of money.
Types of Home Loans – Choose wisely
The amount of money you can borrow may be influenced by the term (length of loan), interest rate, fees, repayments, and other features of the home loan you’re applying for. For instance, a loan with lower fees and interest rates could mean more borrowing power, as it results in lower monthly repayments.
Savings – Stocking up
For most lenders, the more money you have saved for a home loan deposit, the more you’ll be able to borrow. Most lenders require a deposit of at least 5% – 20% of the total home loan amount.
At Easystart, we understand not all first home buyers will have a large amount of savings for a deposit. Learn more about our low deposit home loans here.
Remember, your borrowing capacity isn’t set in stone. It can change as your financial situation evolves. So, whether you’re ready to dive into the property market now or planning for the future, keep these factors in mind. The more you understand about your borrowing capacity, the better equipped you are to make informed decisions on your home ownership journey.