When starting your home buying journey, one of the most critical questions you need to ask and answer is “how much can I borrow?” You can then work out the budget for your property search and the money you need to save for a deposit and other upfront costs.
One of the key parts of working out how much you can borrow for a home loan is knowing your deposit amount. If you’re a first home buyer, you may be able to use the first home owner grant to help cover part of the deposit. But the more deposit you can save yourself, the higher the loan amount you’ll likely be able to obtain.
When researching home loans, you’ll come across the term loan-to-value ratio or LVR. LVR is the percentage of the property’s price you intend to borrow. The higher the LVR, the lower the deposit amount, but this lower deposit may come with the additional cost of Lenders mortgage insurance (LMI).
Other upfront costs come with purchasing a property besides the deposit. You’ll need to consider them all when looking at the budget you set for your property search and when determining how much you can or need to borrow.
Here are the most common upfront costs you’ll pay on top of the deposit:
Lenders will separate their home loans between owner-occupied and investor with different interest rates and terms on each loan type. Part of this will often be that lenders will ask investors to have a higher deposit.
For example, an owner-occupier will be able to access a loan with an LVR of 95%, subject to LMI, meaning you only need to save a 5% deposit. However, an investor mortgage may be capped at 90% LVR, subject to LMI, meaning a 10% deposit is needed. Whatever your circumstances, the more you can save for the deposit, the better off you’ll be.
Working out how much you can borrow for your home loan involves looking at all the factors that a lender will consider when determining your mortgage borrowing capacity. The basic formula for working out how much you can borrow for a home loan is to subtract your monthly expenses from your total monthly income. However, when lenders assess your borrowing capacity, that’s not all they’ll consider. They take a much broader look at your financial situation.
Lenders will look at the below factors when determining how much you can borrow:
Just because you can borrow $1 million, let’s say, doesn’t mean you should borrow that amount if it means you’ll end up under financial stress. You need to consider how much you can comfortably repay over the next 30 years and continue to repay if circumstances or interest rates change.
It’s often wise to budget for interest rates to increase at least 2-3% to give yourself a buffer just in case. This buffer will help protect you from interest rate changes and changes to your personal circumstances like a change in your job, which means less income.
You also have to remember that there are costs like council rates, water charges, and the cost of maintenance and repair of the property you’ll be responsible for as a homeowner.
To help you work out how much you can borrow, you can use a mortgage calculator. It will take in most of the information lenders use to calculate your borrowing capacity and offer a guide on how much you may be able to borrow.
But any calculator you use, even if it’s on your chosen lenders website, should only be taken as a guide. Each lender has its own set of credit policies they apply to your specific circumstances. If you want a more accurate idea of how much you can borrow, you should speak to a lender’s home loan expert directly, and they can help advise.
Once you have a guide on how much you can borrow, you now have a general idea of the budget you can use to search for properties. If you’d like more certainty in that budget, you should seek conditional or pre-approval for a home loan from a lender. A lender will do all the relevant calculations and then let you know how much they are willing to lend you. This approval will be on the condition that your circumstances don’t drastically change before you apply for final approval and only valid for a set period, generally 90 days.
If you cannot apply for final approval before your conditional approval expires, meaning you haven’t found a property, you can often reapply. Get started on your home buying journey today by finding out how much you can borrow or speaking to one of our experts about conditional approval.