How much can I borrow?
This is a question that we get asked almost every day, and while the answer is often really simple, for others it is more complicated. There are two limits on how much you can borrow – how much have you saved, and how much you earn.
In an ideal world you would have saved a 20% deposit for your new home, plus you would have another between 5% to 7% of the price to cover stamp duty, solicitors, government and bank fees, but we don’t live in an ideal world so what are the other options?
Lenders Mortgage Insurance (LMI) – LMI is an insurance policy that you buy to protect the bank and it allows you to borrow between 81% to 95% of the value of the property. Typically the cost of the insurance cover costs more as the percentage borrowed increases, and really lifts once you go past 90%. The cost of the policy can be added to your loan, in most cases up to 97% of the value of the property, but some lenders will even consider going up to 100%.
If you require LMI your Lending Specialist can get an indicative quote for you while you are meeting so you know what you are up for, how much of it we can finance and how much you need to pay yourself.
When you require LMI the insurance company will have requirements about you having 5% ‘genuine savings’, but there options available there as well and your Lending Specialist will be able to guide you through this.
Parental Guarantees – this is where we get the bank to use the equity that your parents have in their property to make up for you not having the required deposit. These guarantees are usually “security guarantees” meaning that we don’t need to obtain all your parents financial details.
There are restrictions on the type of property that can be used, and a lower loan to value ratio will also be applied to your parent’s property so each situation is somewhat different.
Each lender adopts a different approach to these guarantees and each of these have their own risk – sometimes the guarantee is for the whole loan, sometimes just the amount in excess of the 80% that you could normally borrow, sometimes it is set up as a separate loan – your Lending Specialist will walk you through your options and the various lenders policies to allow you to make a fully informed decision.
Your deposit may also come from gifts, inheritances, the sale of other assets (such as shares) and each of these have different requirement for when you want to take out a loan. Talking to your Lending Specialist will clarify your personal circumstances and they can then provide you with a solution that is tailored to your needs.
Lenders will ask you for a complete breakup of your personal living expenses, and then they will measure it against their own standard, applying the higher of the two. The difference between what you earn, and what it costs you to live is the balance available to service your loan. Some lenders will vary their cost of living depending on where you live, while others will include a provision for things such as a fully maintained company car, or Family Support payments and so on.
Once you have determined the balance available to you your Lending Specialist will key your details into our software package to determine how much you can borrow, remembering that lenders use what they call an “assessment rate” which is 2% to 3% higher than the current interest rate.
An example is:
A couple wishing to purchase their first home. The purchase price is $450,000, they have saved $80,000 and wish to borrow $370,000 plus the costs of the purchase.
The loan of $392,500 is 87.2% of the purchase price. This means that they will need to either buy LMI, or get their parents to guarantee part of their loan.
LMI would cost about $5,000, and would increase the loan to $397,500.
In this couples case their parents were not able to help out so they needed the larger loan.
Borrower 1 works in retail and earns $35,000 net per annum, borrower 2 is a financial planner earning $40,000 net. This gives them a combined $75,000 per year, or $6,250 per month.
They have listed their living expenses and arrived at $2,000 per month. The lender has done the same and arrived at $3,294 per month, so we have to use the higher result.
|Income per month||$6,250|
The loan amount is $397,500, and at the lenders assessment rate the monthly repayments are $2,917. With a balance available of $2,956 and a repayment of $2,917 there is $39 per month left over, and their loan can go ahead.
Curious about how much you can borrow?
Below is a calculator that you can use as a guide to how much you can borrow to buy your own home.
Call us today to talk about your financial position and the best way for us to get you into your new home. Call 1800 REG FIN (1800 734 346) and Debbie will connect you with the Lending Specialist best suited to looking after you.