How much can I borrow?

Article by Mozo

Is the Australian property market calling your name but you are unsure of your borrowing power? This guide is here to help. We’ll run you through all the major costs involved with purchasing a property, to give you a clear idea of how much you can afford to borrow and what you’ll need to budget for. Start by...

Calculating how much you can borrow

Your first stop should be our home loan borrowing calculator, which will give you a rough estimate of the amount you can afford to borrow based on you (and your partner's) income and living expenses.

Example: Jane earns $60,000 a year and her husband Tom earns $50,000, so their combined income is $110,000 and our calculator shows they could borrow up to $814,000.

Work out your loan to value ratio

Before you think “woohoo that waterfront property is mine!” we should explain that there is a difference between how much you can afford to borrow and how much a bank will lend you.

Financial providers use a term called loan to value ratio (LVR) to determine whether they will approve you for the home loan.

Example: Jane and Tom have saved up a deposit of $50,000 and are looking to purchase a property worth $500,000. With a 10% deposit, this means their LVR is 90%.

In Australia, banks prefer to lend to borrowers with an LVR of less than 80% (e.g a deposit of 20% or more). This is because it shows the lender you’re able to save and you will be deemed less likely to default on the loan. While there are some providers that offer low deposit 95% LVR loans, you will need to pay lenders mortgage insurance (more on this later).

  • Are you purchasing your first property? Head on over to our first home buyers hub for helpful hints and tips.

Work out your home loan repayments

It’s one thing to ask “how much I can borrow?” but another thing to actually repay the loan. There's no hard and fast rule on how much you should borrow, but one general theory is that your home loan repayments shouldn't exceed 35% of your gross income.

So your next course of action should be to see how much your ongoing repayments will be, using Mozo’s repayments calculator to workout whether you can realistically afford the amount coming out of your account each month.

Example: If Jane and Tom decide to go ahead and purchase that $500,000 property with a $50,000 deposit, a home loan with a 5.5% interest rate over 25 years will mean their monthly repayments will be $2,763. However, If Jane and Tom are financially savvy and compare home loan deals online and find a mortgage with a 1% lower interest rate of 4.5%, this would bring their monthly repayments down to $2,501 and they would pay $78,644 less in interest over the life of the loan.

Since their current rent is $2,700 a month and they will be living in the property they purchase, Jane and Tom should comfortably be able to afford the repayments of the lower rate loan.

But wait, what if there is a rate rise? Using our rate change calculator, if Jane and Tom sign up with the 5.5% home loan a 0.75% rate increase would bring their monthly repayments up to $2,831, so Jane and Tom would then need to ensure that they have a financial buffer in place to cover the extra amount each month. However, if they sign up with the 4.5% deal then their monthly repayments would only go up to $2,697, which is still less than their current rent.

Stamp duty

You’ll also need to budget for the cost of stamp duty, which is a tax charged by state and territory governments and can be pricey reaching into the tens of thousands. Or alternatively you can decide to add this cost to your home loan.

Example: Our stamp duty calculator shows if Jane and Tom live in NSW they would be charged a $18,311 stamp duty fee, as their property value is $500,000 and will be their primary residence. Jane and Tom decide to add this cost to their home loan and use the extra cash they have saved to cover some of the below fees…

Additional borrowing costs

Once you have an idea of how much you can afford to borrow, don’t forget to factor in all the extra costs of purchasing a property into your budget.

  • Mortgage establishment fees: When you apply for a home loan, you may be charged an upfront fee for the lender processing your application that can be anywhere between $0 to $600.
  • Ongoing home loan fees: You may also be charged a yearly fee for the provider servicing your loan, however this generally isn’t higher than $400. Often providers will waive this fee altogether for refinancers.
  • Conveyancer fees: To get your conveyancer or solicitor to look over the contract, you will be charged a fee of around $2,000.
  • Pest and building inspection fees: Don’t want a house with termites? Don’t forget to get pest and building inspection done that will alert you of any critters, as well as any structural problems with the property.
  • Lenders mortgage insurance: As mentioned above, if your deposit is less than 20% (80% LVR or more) you will be charged lenders mortgage insurance. Which isn’t cheap and could cost you thousands, even tens of thousands. Luckily, for those eager to get into the market you can also add this to your home loan amount. Just keep in mind this isn’t a protection for you but instead protects the lender if you default on the loan.
  • Income protection insurance: While you may be able to comfortably afford your repayments, if you were to become ill you would need income protection insurance to cover the repayment costs while you are unable to work.
  • Home and contents insurance: Also make sure you protect the items in your home, as well as the property itself with home and contents insurance.
  • Landlords insurance: If you’re purchasing an investment property and plan to have tenants, this insurance will give you the peace of mind against any mishaps that may occur, like damage to your property or rental loss.

Ways to increase your borrowing power

  • Pay off debt: Being knocked back for a home loan can be disheartening but thankfully getting on top of your debt and paying off any owing balances will help you get back on track and closer to your dream of home ownership.
  • Get a copy of your credit report: Before you apply for a mortgage make sure all the details on your credit report are correct, as any mistakes could hinder your chances of being approved for a loan. Find out how you can get a free copy of your credit report here.
  • Get saving: Make sure you’re putting aside money each month into a high interest savings account, as the lender will check your bank and savings account statements to determine whether they will lend to you.

When you’ve answered the age old question of “how much can I borrow” and are ready to kick off your home loan application, visit our home loan comparison section to find the best deal for you.

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