About to take the plunge on a home loan? This handy guide helps you prepare an application without destroying your credit score
You’re ready to buy your first home or investment property. You’ve worked hard and you’ve saved. But, to turn that dream into reality, you need a loan… and you’re wondering how much you can borrow. You also hear about the General Manager of APRA, Heidi Richards’ statement in 2016:
“Mortgage lending at four times gross income is relatively common, at one-third of all new housing loans. Lending at six times or more of gross income is much smaller but still material – nearly 10 per cent.”
So, given her statement, you’d expect to borrow around five times your gross income. Unfortunately, it’s not that simple. The nature and type of your income is important, too. As does your credit score and expenses. Fortunately, there are a few little known tips you can use to tilt the odds in your favour.
1. How much is your deposit?
Generally speaking, the bigger the deposit you can put down, the better – especially if the deposit is over 20% of the property’s value. Here’s what you might pay each month on a $500,000 property based on different deposit amounts.
The larger your deposit, the lower your repayments for a certain loan size will be. This assumes a 30 year principal and interest loan, repaid monthly, at a 4% interest rate.It doesn’t automatically mean lenders offer you a larger loan. But what most people don’t know is it gives you more power to negotiate a better deal with lenders. It also lowers your the size of your loan and, therefore, reduces your repayment amounts so the loan is easier to pay off.
2. What is your income?
Expecting a raise soon? Many lenders accept a letter from your employer confirming a raise is on the cards.
When you’re ready, see for yourself: Start using this incredibly accurate borrowing power calculator to discover how each of these factors can change how much lenders are likely to offer you.
Be warned, though: Not all income is treated equally. If you are self-employed, some lenders will see you as higher risk. The same applies for casual or contract work. Bank hopping – bouncing from bank to bank until you’re approved – can hurt your credit history. So speak to a qualified expert who can shortlist lenders that are friendlier to your circumstances before applying.
Two incomes are usually better than one. If your partner earns a similar income, it could double your borrowing capacity. But be sure to check your partner’s credit history first. Lenders may see you as a higher risk and reduce the loan amount they’re willing to lend if you or your partner have a poor history.
(Bonus tip: Got a job offer from somewhere else? Some lenders accept a letter from your new employer, too).
3. What are your expenses?
It’s time to cut the fat! Yes, go ahead and eliminate expenses where you can because banks take a good, hard look at your credit cards, loans, school fees and other bills. They’ll use this information to assess how much to lend. So add up all your expenses. Good news: If you’re buying a home to live in, you can leave off your current rent as that payment will evaporate.
Use uno's calculator to estimate your borrowing capacity.
4. How often should I make home loan repayments?
Determine how much you can borrow before filling out loan applications. As you already know, too much bank-hopping can damage your credit rating and restrict your chances of getting any loan at all. So don’t make that mistake. Speak to a qualified expert as soon you as can or use a mortgage calculator.
As you may know, you can nominate a fixed repayment amount on a weekly, fortnightly or monthly basis. Just as long as it’s higher than the minimum contracted loan repayment, lenders can offer flexibility. Depending on your situation, we usually recommend our clients make more repayments in a year. That’s because it saves you money over the longer term and you pay off your loan sooner.
Bonus tip: You should also consider a pre-approval for your loan before purchasing. Most people don’t know, but pre-approvals are fast, easy to get and give you comfort in knowing how much you can afford. Plus, you need a pre-approval loan to bid at auction. Many investors and homeowners make the mistake of doing the groundwork to locate their perfect property, only to miss out when they discover can’t bid on auction day because they didn’t properly organise their paperwork.