The process of working out how much you can borrow to buy your first home is called your "Home Loan Serviceability". If don't have the time to read all this information and would like an Accurate Estimate of how much you can really borrow right now (without all the BS) - No Worries. Give me a call. 1300 365 363. It will only take about 6 minutes and I will let you know precisely how much you can borrow plus let you know of any obstacles you may have to watch out for along the way.
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One of the most common (and important) questions I hear from people I help who are interested in owning their first home is "How much can I borrow". I understand how important this kind of information is to a prospective first home owner, and this is exactly the reason I have put all this information here for you.
Rather than have the usual home loan repayment calculator and other misleading paraphernalia (found on websites all over the internet), I have decided to give you all the inside information that your lender will use to determine just how much they are prepared to lend to you to help you become a first home owner.
The best way for me to answer the all important question of "How much you can borrow" is by explaining how the process of determining your borrowing capacity works from a lenders point of view.
There many pieces that make up your home loan serviceability calculation. Some parts are purely mathematical while other are not so well defined, this is why most calculators that appear online are of little or no value when it comes to how much you can borrow.
The major factors to be considered are;
1. How much you earn
2. Are You a wage earner or self employed
3. Is your job full time, part time or casual
4. How long have you been in your current job
5. Is any of your income a benefit (from Centrelink etc.)
6. What (if any) other debt do you have - this includes:
a. Personal & Car Loans
b. Credit Cards
c. Store Cards or Accounts
d. Interest Free Credit Accounts
e. Plus Any other Home Loans You may already have
7. Are You Single or Do you have a Partner
8. How many children do you have
9. The location of the property you want to own
10.What you intend using the property for (invest, live in)
11.How much deposit you intend to contribute
As you can see there are quite a number of factors that determine how much a prospective lender will be able to offer you in a home loan.
The calculations vary from one lender to another, though they will usually take all of the above information into consideration before agreeing to lend you the money you need to become a first home owner.
For a lender to determine how much you can comfortably afford to borrow they need to work out how much you can afford to repay. The more you can afford to repay, the more you can afford to borrow.
As a rule of thumb Banks, Building Societies and Non banks lenders usually like you to spend no more that about 40% to 45% of your gross income on all of your credit accounts, note this is not just your home loan but all of your credit accounts combined.
What this means is if you have a personal loan, a car loan and a couple of credit cards, the amount of disposable income that you have left to service a home loan is greatly reduced.
I usually explain this it in terms
of an imaginary cake that
represents you gross income.
From this imaginary cake
your lender will calculate what
you will comfortably be able to repay on
a weekly, fortnightly or monthly basis, as I said above the size of this slice is about 40% of your gross income.
From this 40% slice all your other repayments will take their share, every other repayment will reduce what you have left over to pay off a home loan and the smaller the home loan repayment you can afford the smaller the home loan you will be eligible to receive.
Let's look at the factors we mentioned above and how each will affect your home loan borrowing capacity;
1. How Much You Earn
This one is self explanatory, the more you earn the more you can afford to repay, and the larger the slice of your gross income that is available for you to devote towards your home loan repayment, and the larger you home loan can be.
2. Are You a Wage Earner or Are You Self Employed
The main difference here is how much information a lender will require from you to prove your income.
If you are a wage earner and have been in your current job for at least six months you should not have too much difficulty proving your income to your lender. Usually a couple of recent pay slips and maybe your most recent Tax assessment notice will do the trick. There are some exceptions to this though it can be considered standard for most lenders.
If you are self employed, the process of proving your income to a lenders satisfaction can be more difficult. You need to provide your prospective lender with your last two years tax returns plus it is also not unusual for a lender to want to see information provided by your accountant to add further proof that you are earning what you say you are.
It can be quite difficult sometimes and this is why so many self employed people these days are using loans called Low-Docs and No-Docs to help buy a home. These types of special mortgages require far less information to be provided to a lender to prove your income.
The down side of these types of loans is that the interest rates are usually higher than a standard home loan (these are called Full-Doc loans - Fully Documented), the reasoning behind this being the "increased risk" for the lender involved.
Most home loan providers perceive this extra risk because they have not verified your income. The other negative element of Low-Docs and No-Doc mortgages is the amount a lender will be prepared to let you borrow as a portion of the value (or purchase price) of your first home (or other property).
Fully documented borrowers can expect to be able to borrow up to 100% of the purchase price of their new home. In some special cases it may be possible to borrow up to 106% of the value of your new home, though these loans can be expensive to apply for and to pay off.
Low-Docs and No-Doc loan on the other hand usually are limited to a maximum of 80% of the purchase price (or value) of your home. This loan to home value ratio is called the L.V.R.
3. Is Your Job Full Time, Part Time or Casual
Once again this does not require too much explanation. The more you earn the more you can afford to repay, and the larger the slice of your gross income that is available for you to devote to your home loan repayment and the larger you home loan can be.
With casual employment though because of its volatile nature a lender will often only factor your casual income at about 60% of the actual amount you receive.
Please note I am not advocating the right and wrong of how most lenders look at your situation when it comes to your buying a home loan of your own, I am merely telling you how it is so you can be ready when the time comes.
4. How Long Have You Been In Your Current Job
This does not directly impact on your home loan servicing calculations, however most, if not all lenders prefer to see stability in your employment track record.
Most banks will want to see a minimum of six months with your current employer (two years if you work for yourself) and preferably longer and they will want you to be free of any probationary period before they will commit to lending any money for you to buy your first home.
Sometimes a letter from an employer stating your income and your non-probationary status will allow you to apply successfully for your home loan.
In the case of less than six months with your current employer a lender will like to see some consistency of employment. For instance if you were an electrician for
