How much can I borrow ?
There is a simple how much can I borrow calculator at the bottom of this page.
Usually the first question first home buyers ask is how much can I borrow?
Each bank has their own policy on who on how much and to whom they are willing to lend. As mortgage brokers, our job is to understand each bank’s lending policy. We make sure when we recommend our clients to a particular bank there won’t be any surprises. When clients ask “How much can I borrow ?” the better question is how much can I borrow so I’m still comfortable?. Our general position is that banks will lend you more than what is comfortable.
When first home buyers ask how much can I borrow? There are two parts to this answer:
- What is the maximum loan amount? And
- What is the maximum loan to value (also known as the LVR) the bank is willing to lend to?
What is the Maximum Loan Amount?
The maximum loan amount is calculated as a combination of:
- Your income. This is usually easy to determine from you payslips or tax returns.
- Your living expenses. Living expenses have been highlighted by the banking regulator so banks are spending more time looking at expenses. Some lenders ask for up to 3 months bank statements to confirm what you spending it. Click on the link about to get an explanation about living expenses.
- And if you have any other liabilities like credit cards, personal loan or car loans. The bank will always do a credit report on your when making their assessment. Your credit report will usually list your recent credit applications which will list if you have any credit cards, car loans, personal loans or other debts.
The amount you can borrow is your income minus expenses minus liabilities minus the new loan repayments. Even though interest rates are around 4%, the banks will stress their calculation assuming interest rates are at least 7.2%. We know interest rates will go up in the future so we need to make sure you can afford it when it does. If there is any money left in the above calculation, the bank is usually willing to lend the money.
What is the maximum LVR you can go to?
Most banks for first home buyers will set the maximum LVR at 95% including Lenders Mortgage Insurance or LMI. LMI is insurance the bank makes you pay to protect them. This means when the bank says you need 5% savings, you actually need 5% plus whatever the LMI costs is. Remember you will also have settlement agent fees and other costs you need to cover. When you add this all up, you need to have about an 8% deposit for most lenders. There are a few lenders who will go to 98% LVR so you might need something closer to a 6% deposit.
A borrower’s capacity to service a loan often supports a different position to their cash and equity position. The bank will always take the most conservative view in how much to lend you. This means even if you had a huge deposit to reduce the LVR to below 50%, the bank won’t lend you the money if they don’t believe you can pay it back.
At Orange, we’ll show you ways to pay off your loan as quickly as possible and hopefully savings you thousands in interest costs. It is better the money stays in your pocket rather than paying it to the bank.