Three keys to learning how much you can lend
HOW much can I borrow?
As a mortgage broker the question of how much can I borrow is asked by almost all of my clients.
It’s a simple question with a bit of a complex answer, and I answer with, “Well that depends”, which for someone like me who likes to give precise answers to my clients, it’s a little frustrating … But then again it’s my job to evaluate these three factors and give you that answer.
Firstly you need to have deposit. In a perfect scenario you would have saved a 20 per cent deposit plus the costs of purchasing such as stamp duty.
If you want to buy a house for $450,000, this 20 per cent deposit is $90,000 ... not an amount that most people are able to save.
You can then use a product called Lenders Mortgage Insurance (LMI), meaning you might only need a 5 per cent deposit, you pay the insurance premium which insures the lender in the event that you cannot make your repayments. Or you can have a family member that has equity in their own property and is prepared to go guarantor for you.
Secondly, you need to show the lender that you can make the repayments on the amount you want to borrow. This ability to repay is called “serviceability”. It’s based on your income, the number of dependants you have, credit card limits, car loan repayments and your actual personal living expenses.
So you might have saved the $90,000 in the example above but that doesn’t mean you can in the lender’s eyes afford to make the monthly repayments on the $360,000 loan.
Finally, how much you can borrow depends on the credit policy of the lender you talk with. As an example some lenders allow overtime income to be used in their servicing, others reduce that amount by a percentage. There are lots of differences in lender policies and this can mean big differences in the amount you can borrow.
So how much can you borrow, is based on your deposit, your serviceability and the lender’s policy, and just remember how much you can borrow and how much you should borrow are not always the same.
Michelle Heagney is an Authorised Credit representative of Geelong Loans Pty Ltd, Corporate Credit Representative of Southern Cross Broker Network Pty Ltd, and Australian Credit Licence No. 384993