“How much can I borrow?” is a standard question for many prospective residential property purchasers. The start point should be what repayments can you afford to make? Banks do not willingly issue loans to clients who cannot afford to repay them, they are under regulatory pressure to lend responsibly, but you should always check your own numbers as well!
The bank term ‘loan serviceability’ refers to their test which largely determines your borrowing capacity. It is important to note that every bank has different rules and parameters, in fact the same person asking at 20 different banks and financial institutions can receive 20 different answers to how much a bank will lend to them (one advantage of using a broker!)
Every different component of the analysis can vary bank to bank. For example how long you have worked at your current position matters, even how you earn your income: Base wages, overtime, penalty rates, commission, independent contractor, self-employed, rents, dividends, child maintenance.
‘Assessment’ rates vary and will not be the same as the actual interest rate payable. Banks will add a margin when assessing serviceability, to make allowances for future interest rate rises, they will also assess at principle and interest repayments.
Negative gearing allowances also vary bank to bank, having significant impact where investment loans are evident.
Then you need to consider your actual monthly living expenses. How much of your income do you already spend? Many banks will look at your last 3-month bank statements and credit cards, that should be where you start too. You may need to stop spending before you apply for that loan.
Credit card limits are important, banks will allocate repayments based on your card limits whether you have them maxed out or not.
Personal loan and car loan repayments will severely limit your borrowing capacity. If you are wanting to buy property consider the effect that holiday or car may have on your serviceability before you make the purchase!
Even more important is your credit record. Pay your bills on time (including that mobile). If you are unsure of your credit record discuss that with your broker.
Nicholas Berry Credit Representative Number 472439 and Thomas Bailey Credit Representative Number 472440 are Credit Representatives of Integrity Finance (Aust) Pty Ltd – Australian Credit Licence 392184.
This information is of a general nature and does not take into consideration anyone’s individual circumstances or objectives. Financial Planning activities only are provided by Integrity One Planning Services Pty Ltd as a Corporate Authorised Representative No. 315000 of Integrity Financial Planners Pty Ltd ABN 71 069 537 855 AFSL 225051. Integrity One Planning Services Pty Ltd and Integrity One Accounting and Business Advisory Services Pty Ltd are not liable for any financial loss resulting from decisions made based on this information. These articles are not owned by Integrity One Planning Services. Please consult your adviser, finance specialist, broker, and/or accountant before making decisions using this information.