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Thinking of purchasing a house and want to know what factors lenders use to assess your borrowing capacity?
Your personal income, expenses and saving deposit are the biggest factors determining your borrowing power, but lenders also consider other factors such as your bonuses or commission.
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The main purpose of using a borrowing power calculation by the home loan lenders is to make sure the borrower has sufficient means or income to pay for the home loan commitments after paying all his or her living costs or liabilities.
Home loan lenders in Australia, generally, will use the borrower’s Debt to Income Ratio also known as DTI and Net Surplus Income as primary indicators to work out your borrowing power.
The stress test is a process in the home loan finance industry where the total home loan repayments are generally calculated with a 2.5% buffer added to the interest rate to ensure the borrower’s ability to repay the home loan over a long term.
In some circumstances, home loan lenders also have a minimum net surplus amount.
ost home loan lenders will decline your application if the borrower’s debt to income ratio (DTI) is more than 6.
For example, assuming your lender accepts 100% of your gross income and your gross income is $100,000 and your total debt is $600,000 then your debt to income ratio (DTI) = 6.
The two main factors which determines your total assessable income which is used in borrowing power formula are your income type (eg: type of employment you are in) and the amount of income you have been paid in recent months.
If you are thinking getting a home loan, it is important to remember, the assessable income is the amount of income your lender is actually using in their calculation when assessing your borrowing power or the home loan serviceability. Remember, your actual total income is not always counted in full as it is often influenced by the home loan lenders’ opinion of that type of income you have.
When assessing your borrowing power, not all income types are treated equal. The home loan lenders in Australia, generally, will have a fixed percentage for every type of income.
To understand assessable income by home loan lenders, it is important understand the following:
Not all home loan lenders will shade or reduce your actual income in all situations, so talk to a good mortgage broker if you’d like to know which home loan lenders will shade your income.
If you have been able to save a large deposit to buy your home, a home loan lender or bank will more likely lend you more. As a general rule, most mortgage lenders will generally only let you borrow less than 90% of a property’s value. For example, if a property costs $800,000 and you have a $80,000 the deposit, the home loan lender in Australia will only lend you $720,000.
In most situations when you have a guarantor or equity on the property, you can borrow 100% of the purchase price. Otherwise, you can only borrow a maximum of 90% of the property value.
A ballpark calculation will give an estimate of $2000 per month which is equal to 30% of $80,000 annual gross income divided by 12. With a mortgage at 3% p.a. this equates to a loan amount of $450,000. A 10% deposit towards the home loan will equates to $45,000 and this will make the maximum affordable property price to be $495,000. Please note, this is an estimate. Please talk to a good mortgage broker in your area to give an accurate amount you are able to borrow.
The equity you have in an existing property or amount of savings can substantially improve your borrowing power and it’s a big advantage for those purchasing a second home or an investment property.
If you have held for a period of time, then shares, cash, money saved in term deposit, equity in a home and inheritance can all count as genuine savings.
Most home loan lenders place a large emphasis on the LVR (Loan to Value Ratio) when assessing your mortgage loan application. The home loan consider a person with the lower LVR, the lower is the risk to the bank. In most circumstances, the home loan lenders consider loans with a LVR of over 80% to be a higher risk.
The bigger the deposit you have towards buying a property, the better the home loan deals you will be able to get such as the lower interest rates. Home loan lenders in Australia often have bands in which rates become cheaper as the deposit becomes bigger.
The short answer is, yes, however your current property becomes a security on the new debt. By using the equity in your currently owned property allows you to buy a second property with no cash deposit. Please consult a qualified financial advisor or mortgage broker to learn more about using your equity towards buying another property.
© 2021 Borrowing Power Calculator