How much income do you need so you can afford to repay the loan?
If you’re thinking about buying a home one day, or you’ve started to save for your deposit, it’s a great idea to work out how much you can borrow (borrowing power) so you know what price range you will be looking at.
So how will you know what you can afford? Unfortunately it’s not as simple as saying the repayments will be $500 a week and if you can afford that you can get the loan. The Banks and Lenders look at a lot of different factors, just some being;
Base pay
Your base pay is required to work out what your income is before and after tax without any entitlements etc. this amount is used as your income because it is your guaranteed minimum amount.
Overtime and Allowances
You can still use overtime and allowances as part of your income if they are consistent however most lenders will use 80% of the total amount to allow for variances in the future.
Current loans and repayments
It’s important that you can still afford to make your current loan payments once your home loan repayments start. I have bene asked if a personal loan can be added to the home loan when the new home gets purchased and this can only happen in rare circumstances (for example Family Guarantee) with particular lenders. In most cases it’s cheaper for you to keep the personal loan rather than adding it to a 30 year loan term anyway. If you find your Personal loan repayments are affecting your borrowing power for a home can consider refinancing them into one Personal loan however you would need to consider if this will benefit you.
Credit Card Limits
Yes your Credit card limit will have an impact on how much you can borrow. A lot of clients think that the Credit card balance is what counts however this isn’t the case. When it comes to Credit cards the Banks and Lenders assume you owe the full balance and this is to cover you should you max out your credit card and have to make the repayments on it.
Your monthly living expense
When you apply for a loan your Broker will ask you what you estimate your monthly living expense is so they can include it in the servicing calculator. A heads up, if your estimate is considered below average then the Bank or Lender will use their figure in your calculation, so it’s worth being honest. The idea behind this is you are used to a certain lifestyle and the last thing the Bank or Lender wants is for you to start struggling to make your repayments and therefore have to sacrifice your living standards.
Any Dependants
Dependants are typically children but they can also be a spose or partner who is not working. The idea is if there are two adults in the home and only one is working then the income needs to be a bit higher to support both adults and or children.
Why are there so many things to consider?
You may or may not be aware, Interest rates are at an all time low. This means if the Banks and Lenders didn’t get a bit tighter about how much people can borrow then when interest rates start to increase there will be a lot of people with loans they can no longer afford which is bad for everyone, The home owners, the Banks and Lenders, the economy, everyone.
So if you’re just starting to think about buying your first home, or you’ve started to save then make sure you join my First Home Buyer’s Program, it will provide you with much more information to help you on your journey. If you are close to buying but you have no idea where to start or would like to know how much you can borrow then feel free to Contact me.