How Much Can I Borrow to Purchase a Home?
If you’re planning to buy your first home, you’re likely to apply for a home loan to fund your purchase. Therefore, it makes sense to find out about your borrowing capacity before you go house hunting to avoid getting disappointed at a later stage. For instance, you might like a property but when you apply for a home loan you realise you can’t afford it, as your borrowing capacity is lower than what you planned to borrow.
Getting a fair estimate of the amount you can borrow, helps you narrow down your search. It also enables you to figure out your future repayments so that you don’t spread yourself too thin while buying a house.
What Do You Mean By Borrowing Capacity?
Your borrowing capacity is the maximum amount of money a lender is willing to lend you for purchasing your house. It depends upon your home loan serviceability, which is calculated using a complicated formula by lenders. Most lenders rely on multiple factors to work out this amount. While the criteria may differ for different lenders, some common factors affect your borrowing capacity. These include your income details, current assets and debts, credit card limits and general living expenses. You can use a borrowing capacity calculator to roughly figure out how much you might be able to borrow by entering your income and expense details.
Another factor that impacts the amount you can borrow is your deposit size. Most lenders require you to provide a 20 per cent deposit to be eligible for a home loan. Some lenders may allow you to borrow with a lower deposit, but you might have to pay lenders mortgage insurance (LMI) fee. This is a one-time insurance premium payment that protects the lender against any losses if you default on your loan anytime during the term. However, some low-risk professionals like doctors, lawyers and accountants might be eligible for an LMI waiver. You can speak with your mortgage broker to check your eligibility for any professional discount or offer.
Borrowing Capacity vs. Home Loan Affordability
Your borrowing capacity is just an estimate of the amount you can borrow to purchase a house. However, you’re also required to repay what you borrow (along with interest!) within a specified timeframe of 25-30 years. Considering that your home can be one of your most expensive investments and a financial commitment, it’s essential to work out a budget and check whether you can afford the repayments on your home loan or not.
Interestingly, the amount of money you’re eligible to borrow might be different from what you can afford to borrow (or repay, to be precise). For instance, you may have poor credit on your file, which will reduce the amount you can borrow. But your financial condition might have improved over the years, and you can afford a higher repayment in your present situation. If that’s the case, you may consider discussing your situation with a broker to apply for a specialist home loan. You could also choose to wait it out while following these tips to repair your credit.
Conversely, you might be eligible for a higher loan amount that you cannot service. It’s worth using a mortgage repayment calculator to figure out a reasonable amount that you can repay without running yourself into the ground. Some experts recommend that you calculate your monthly repayments at a higher interest rate (about 2 to 3 per cent more than the average interest rate) to account for any future rate hikes. You’re most likely to be comfortable with a monthly repayment that matches your current rental costs. However, if your repayment amount considerably exceeds your current housing expenses, you might find it challenging to meet other necessary expenditures and reel under mortgage stress. It’s perhaps better to go for a smaller unit or rework your budget to buy an affordable property that you can enjoy stress-free.
