Of course everyone wants to know “how much can I borrow for a home loan?” but it’s not always easy to find out.
You may have looked at the banks websites and tried one of the mortgage calculators so you have already worked out what you are comfortable with, and in your view you know what you can afford.
But that’s not how the banks look at things.
Banks are generally conservative when they work out what you can afford, and they do this because they are looking at a long-term financial commitment which can be up to 30-years. Therefore they will say they need to be sure that you can get through harder periods with higher interest rates, and still be able to pay the mortgage on time without causing hardship.
When a bank assesses how much you can get for a home loan they look at your income, your living expenses and any other expenses including repayments for any finances and of course the home loan that you want too.
But as mentioned the banks are conservative and they don’t always use the same numbers as you might.
Some of the differences are:
Income – the lenders will look at your income and may scale or not include any income that is not regular. Things like overtime, penal rates, bonuses, commissions, contract income and other income that can be subject to change.
Boarder Income – some lenders restrict this to ‘say’ $150 per week, or for low deposit lending they may not allow at all.
Benefits – the lenders want to know that these are ongoing and so some may not be included. This includes child support benefits where children are older, and benefits that may cease or are not confirmed as ongoing.
Home Loan Repayments – you may have checked what they are based on the current home loan interest rates, but banks and non-bank lenders use a higher test rate and so the repayments that they use will be higher than what they would be.
Credit Cards & Store Cards – most banks will assess the commitment to these based on the limit, not what you owe. They then apply the test on the assumption that you are owing the limit and apply 3.8% as the monthly repayment. If you have limits of ‘say’ $10,000 then the repayment is assessed at $380 per month regardless what it actually is.
Buy Now Pay Later – like the credit cards there are calculated at the limits, but instead of assessing at 3.8% some apply a rate of 5.0% so the same $10,000 limit would be assessed at $500 per month regardless what you actually owe. With buy now pay later people are not even aware that the accounts are still active and so can cause issues when assessed automatically. READ MORE HERE
Other Loan Repayments – generally these are taken as what you are paying, and if you are paying the loans off faster then they default to the higher repayments; hance leaving less for your new home loan.
Your Expenses – most banks and lenders now source bank statements via an automatic download or if you bank with the same bank that you apply with then they have access. With this they can get a summary of your spending that’s automatically used unless you know what they are seeing and can explain why they should view it differently. As mortgage advisers we use the same system and always review the expenses before submitting to the bank, and therefore we can identify any potential issues and address them in advance.
These are some of the things that you should be aware of if you are trying to work out what you can afford.
To make matters even more difficult (although sometimes an advantage) the banks all use slightly difference ways to assess an application. The disadvantage is that a lot of first home buyers go to their main bank and get told that they cannot afford enough, and may just give up on the basis of that advice.
Whereas the advantage is there are other banks that may have an assessment that suits you better. This is where a mortgage adviser can really help as they know which banks may suit your situation better.
Get A Quick Assessment First
If you want to find out how much you can borrow for a home loan and get an answer quickly then our Quick Assessment will give you a really good indication and quickly too.