Monday, July 28, 2008

How much can you borrow?

If you’re like most of us, buying a home is the biggest investment you will ever make. Since very few people are able pay cash, obtaining a loan is the foundation of home ownership. How much you borrow depends on a number of factors:

  • Your income and expenses
  • Estimated repayments
  • Serviceability
  • Assets and liabilities
  • Your lifestyle
  • Your deposit

Before you start looking for a home, think carefully about your spending habits. Compare expenses and income by preparing a budget noting all major upcoming expenses such as replacing your car, holidays, school fees, etc. Knowing exactly how much you spend each week is essential in determining how much you can afford to borrow. Having a realistic picture of your finances will avoid costly knock-backs from a potential lender.

Avoid being rejected for a loan. Lenders frequently trade credit information. A decision to decline a loan appears on you credit report and can harm your chances of obtaining a loan with another lender.

When deciding how much you can borrow, lenders will look at your serviceability - whether you can afford the repayments over the life of the loan, not just while interest rates are low. To do this, they use a benchmark figure that is usually several percentage points higher than the prevailing variable rate. Your repayments will also be assessed against your income. In most cases, the upper limit for minimum repayments is about 35 per cent of pre-tax income (or about 30 per cent of combined income for joint borrowers). Some lenders may use your uncommitted income - what is left over after all household expenses - to determine your repayment capacity.

In most cases, to be eligible for a loan you must own more than you owe. Lenders will look carefully at your existing assets and liabilities. Assets include furniture, jewellery, car, savings and investments that you may have built up over the years. Lenders will assess your credit risk to determine whether you are likely to default on the loan. Factors like your occupation, employment history, where you live and past loans are used to build a credit profile. Your credit risk can influence how much you can borrow.

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