Courtesy of Jeromy Harris, Holman Mc Gregor Financial Services
For most people, buying a home will be their biggest investment. But unless you’re lucky enough to be cashed up to buy your new home outright, deciding on how much that investment should be has a lot to do with how much you can afford to borrow.
A good rule of thumb is that the weekly repayments should be less than 35 per cent of your weekly pre-tax income for singles and 30 per cent for joint borrowers to keep the repayments at an affordable level. Your lending specialist will translate that into a ball-park figure for how much you can afford to borrow. But this will just be a rough guide.
When deciding on how much to borrow you should take into account:
- How much you earn (income)
- How much you spend (expenses)
- Your existing assets (anything of value you own)
- Your existing liabilities (any debts and repayment commitments)
- How much you’ve saved for a deposit
- Your credit profile
- Serviceability, and
It’s worth spending the time to put together a budget that compares all of your weekly income and expenses. Lenders will want to know the same information to make sure you can afford your repayments.
Along with the usual weekly expenses, don’t forget to factor in major purchases such as holidays or replacing the car. This should give you a good indication of your ‘net’ position, or what’s left over at the end each week to service your home loan.
Lenders will also look carefully at your existing assets and liabilities. In short, to get a loan you must own more than you owe. The simple advice here is to close as many credit accounts as possible. Each credit card or store credit will reduce the amount any lender is likely to approve. If you still need to hang on to one or two credit cards, reduce the credit limit as it’s the limit and not the balance that lenders take into consideration.
The keys to getting a home loan are your credit profile and serviceability. Lenders will build your credit profile based on background information such as your occupation, your employment history, whether or not you are self-employed, where you live and past loans.
Your credit risk determines how likely you are to default on the loan which in turn may influence how much you can borrow.
Serviceability is about whether you can afford the repayments over the life of the loan, not just while interest rates are low. To do this, lenders use a benchmark figure based on average interest rates over a number of years. The rate is usually several percentage points higher than the variable rate.
As a last piece of advice, consider your lifestyle and look at where there may be extra capacity to cut back on expenses. Think carefully about your spending habits. But while some people will happily make lifestyle sacrifices to own their home, others may not be so ready.
It’s about getting the balance right between owning your home and still enjoying life. Cutting back too hard on your lifestyle usually won’t last long. Being realistic now about where you can cut back will give you a better indication of how much you should be borrowing to buy a home.