Before you begin house hunting the most important thing to do is to work out exactly how much you can afford to spend on home loans. Many first home buyers do this by simply calculating if they can afford monthly mortgage repayments. But while mortgage repayments are important, they are not the only thing that needs to be considered. Buying a home can result in many unforeseen costs. It is important to know all the expenses involved upfront to avoid any unwanted surprises along the way.
How Much Can You Borrow?
The amount you can borrow on home loans will depend on a number of factors.
1) Your Income
This is the most important factor which will determine the exact amount you can borrow. Your income needs to be able to cover repayments on your home loans as well as your basic living costs. If you are applying for the loan with another person your repayment capacity may be greater, which can mean greater borrowing power.
2) Employment Status
One of the main things that lenders will look at is if you are employed. The lender will look at where you are employed and how long you have been employed by that corporation.
3) Financial Commitments
Lenders will look at all other financial commitments you still having owing. This can include car repayments, personal loans, credit card debts and HECS debts.
4) Your Assets & Investments
Your savings and other investments will also impact your borrowing capacity.
5) Your Deposit
First home buyers should save around 10-20% of the property value as a deposit. The greater your deposit, the lower your Loan-to-Value Ratio (LTV). Mortgage lenders judge a candidate based on a number of criteria, but the lower the LTV, the more chance of acquiring a loan. Put simply, the less you have to borrow the lower your repayments will be.
Note: If you borrow in excess of 80% you will be required to pay lenders mortgage insurance (LMI). LMI is a policy designed to get more people into the market, but be aware that if you default on your loan, the insurance company has the right to chase you for their losses after the sale of your property. If you need to borrow more than 90% of the value of your property and you are not 100% sure that you will be able to make all the associated costs, it is best to reevaluate the timing of your investment.
6) Your Credit Record
The lender will check to see that you have no red flags against your name for defaulting on previous home loans, credit cards or other lines of credit by looking at your credit record. It is worthwhile to check your credit record before you apply for a home loan so you are able to amend information in your credit history if you believe it to be inaccurate.
Where can you check your credit record?
Veda Advantage Ltd provides a range of consumer information services to help consumers to be better informed in making major decisions such as applying for a home loan. Veda Advantage Ltd will give you access to your credit history so you can analyse your financial situation before applying for that home loan.
To access a copy of your credit history, go to www.mycreditfile.com.au or phone (02) 9464 6000.
1. Home Loans: What Can You Afford? Don’t Guess!