Thinking about buying a property? Here’s how to calculate your borrowing power

Thinking about buying a property? Here’s how to calculate your borrowing power.

If you’re thinking about taking the plunge into the property market, it’s important to have a clear idea of your borrowing power before you start your search.

With Australia experiencing record low interest rates and soaring property prices, many people are stretching their budgets to get a foot on the ladder. Recent data shows an estimated 669,000 households are currently experiencing mortgage stress, a number which is expected to rise if interest rates jump.

Knowing how much you can safely borrow will ensure you limit your search to properties you can afford… whatever the future holds. So how do you work it out?

Here are the six main things lenders look for when they are deciding how much to lend you, and tips to help you calculate your borrowing power.

1. Income and living expenses

The higher your income compared to your living expenses, the more money you have left over to service a loan and the more lenders will be willing to lend you.

Lenders like to see clear records of a secure income over time. For people earning a salary this is usually easy to do, but if you’re self-employed, freelance or work in seasonal or commission based roles you’ll need to provide comprehensive records.

When it comes to expenses, all lenders are required to build in assumptions about standard living expenses when they review a loan application based on ABS data. Don’t rely on them. Set up a budget and track your spending over a month or two to see if what you think you spend lines up with track what you do.

Be honest with yourself, and don’t forget to factor in “hidden” property costs such as inspection costs, legal fees and stamp duty, as well as upcoming life events like a wedding or a baby.

2. Existing debts

Any existing debts you have will dramatically reduce the amount you can borrow. Yes, even credit cards that you pay off in full each month.

Car loans, personal loans, credit cards, store credit and any other type of loan will all count against you, as they eat into your income and reduce the buffer you have to meet your home loan repayments.

Want to make yourself more appealing to lenders? Repay as many of your existing debts as possible before applying.

3. Interest rates and loan terms

Generally speaking, the lower the interest rate the more you can afford to borrow, as repayments will be lower.

However, keep in mind lenders build an interest rate buffer into their calculations, which means what you think you can afford may not match up with what they do.

For example, if you’re applying for a variable rate home loan with an interest rate of 4%, your lender may be looking at what would happen if interest rates jumped to say 7 or 8%. They do this to prevent borrowers from maxing out their budgets at low interest rates, only to default once interest rates inevitably rise.

Other things to consider are a longer loan term or an interest only loan mean repayments will be lower, but you’ll pay more interest paid over time.

4. Your credit score

Any black marks on your credit report such as missed bill payments or defaults on debts will negatively affect your borrowing power.

Not sure what’s on your report?

Request a free copy from Veda Advantage, and don’t fall into the trap of paying for one of their premium services.

5. Your deposit

When it comes to borrowing power, the larger the deposit the better.

A larger deposit shows lenders you are able to maintain good financial habits over time, and also means you’ll have to borrow less to buy the house, which will save you on interest and help you pay the loan off faster.

The minimum deposit you’ll need is 5% of the property value, but a deposit of 20% or more will mean you avoid paying Lenders Mortgage Insurance, which can be a significant cost.

6. Your assets and the type of property you’re buying

Assets you own outright may favourably influence a lenders’ decision, for example a car, shares or another house.

The type of property you want to buy will also play a part, for example a house versus a unit, or investing versus buying to live.

So… how much can I actually borrow?

The best way to work out how much you can borrow is to use a borrowing power calculator before applying for a loan.

See how the following scenarios affect what you can borrow:

  • Increasing income and/or decreasing expenses
  • Reducing debts
  • Changing the loan purpose.

And remember, just because you’re eligible to borrow a certain amount, doesn’t mean you should!

While lenders are inherently conservative (it’s in their interest to only give loans to people who can afford to repay them), that doesn’t mean they will get it right. It’s up to you to be realistic about your situation and make an informed decision.

How to secure a mortgage in your 50s

Australians are stepping onto the property ladder later in life but older buyers have to jump through hoops to convince banks to put them on their loan books.

The average age of first-home buyers is 38 and with house prices climbing faster than incomes many borrowers aren’t able to enter the property market until their 40s or 50s. Our ageing population is also contributing to the growing army of older borrowers.

Allan Faint, director of Home Finances Centre of Australia, says borrowers purchasing or refinancing a home in their 40s or beyond need to provide lenders with extensive information to prove they can service the mortgage.

“With an older a borrower, lenders will put a greater focus on the proof of income to service the mortgage, not just now but over the life of the loan,” Mr Faint says.

“Nearly all banks require borrowers over 50 to have a retirement exit strategy to show they definitely have the capacity to make the mortgage repayments.”

Prepare your paperwork

This can include proof of substantial superannuation or investments and other income that will continue after retirement, as well as evidence of income, expenses, employment, assets and liabilities.

“Lack of superannuation puts older borrowers under greater scrutiny when purchasing and refinancing property,” Mr Faint says.

“Most banks will require an owner-occupier in their 50s to show enough superannuation or assets to cover the loan so that if they get into trouble at retirement they will be able to use their super to pay out the loan balance.”

Never too old for a mortgage

The Age Discrimination Act prevents lenders and brokers from treating older home loan applicants differently from younger buyers, and the big four banks say there are no age restrictions or health assessments for first-home buyers.

Mr Faint believes more lenders are recognising the emphasis should be on an applicant’s capacity to repay rather than their age.

“I don’t think banks have become tougher with their lending criteria for older buyers in recent years and some even appear to have reduced the age for requiring exit strategies,” he says.

More lenders now specialise in mortgages for senior borrowers and a broker can help home hunters access these niche banks.

There is also room for a different range of living options which can make it financially viable to buy a house later in life.

Property data shows more seniors are buying houses with their children and living in dual-occupancy houses. They are also living with adult children who are carers and assisting with mortgage repayments.

Mr Faint believes it’s never too late to buy a property as long as you plan for various stages and financial challenges in your life and consider affordable housing options.

“Be realistic about what you can afford, look outside the big housing markets such as Sydney and Melbourne and think regional or the more inexpensive capital cities such as Hobart and Adelaide.”

Top Tips

Demonstrate a good savings history such as a share portfolio or other investments

Show a sound borrowing history

Show proof of income

The bigger the deposit the more willing banks are to lend

Have a defined exit strategy

Search for a specialist lender

Consider buying with a family member

Consider regional markets for affordability

Retirement age can vary between lenders

Be sure the mortgage suits your circumstances