Module 1 – Lesson 3 – Borrowing Power (10 Min)

How much can I borrow? Is there a simple formula? What do lenders look for?

We explore how lenders calculate your borrowing power in this lesson.

It is very important that you conduct your own quick budget.

RENT + SAVINGS SHOULD EQUAL WHAT YOU CAN AFFORD ON A MONTHLY BASIS
As a general rule of thumb, you can borrow 5-6 times your gross annual income (for simple borrowers)

Did you know?
There’s only one letter that doesn’t appear in any American state name. There’s a Z in Arizona and an X in Texas, but no Q in any of them.

Prefer reading? Here is a transcript of the video;

Hello and Welcome. This is Paul Pappas from Mortgage Choice. You’ve decided to buy a property. You’ve worked out your own budget, but how much will the banks lend you? What is your borrowing power? What factors are important to the banks in terms of determining? How much they will lend you do? Do you agree with their figures? More importantly, do they agree with yours?

Let’s have a look at what factors are important to the banks in determining your borrowing power to purchase your first property. Well, firstly, quite obviously the first one is simple your income. How much are you earning? Now, this obviously could be your base salary but commonly in our what we find is that a lot of our clients are getting regular bonuses, commissions, or other allowances depending on what type of work they do. Your income is an important factor.

What are your expenses in terms of what are the loans you have in place in terms of personal loans, credit cards, HELP debts? More commonly these days, these buy now pay later type schemes like AfterPay come into play as well.

Current interest rates come into play as well in terms of obviously the higher the rate, the less that the banks will lend you. The product selected in some situations a fixed-rate loan allows you to buy, borrow a little bit more than a variable rate line because it gives the bank the bank’s got a little bit more certainty. 

Your family situation in terms of, you know, are you married, kids that type of situation because of your higher living expenses can come into play as well. These are the factors that come into play when the banks are working out your borrowing capacity. But, if you’re trying to work it out for yourself, a very simple rule of thumb that I’ve always had for many years is to work out your own budget in terms of your rent plus savings. In other words, What are you paying for rent? 

Let’s just assume $500 a week, $2,000 a month. Add that to your current level of savings. You’re saying how much you’re saving on a regular basis? For argument’s sake, let’s just say a $1,000 a month. In other words, if you’re paying rent of $2,000 a month and saving a $1,000 a month. You can afford $3,000 a month towards your loan. Now that doesn’t necessarily mean that the bank will allow you to borrow whatever it takes for you to that equates to a $3,000 a month loan repayment. Because all those previous factors that I’ve discussed come into play, and sometimes the bank’s assessment is different from your own. So to give you a good start, work on those last factors in terms of our rent plus savings.

Will all banks lend you the same? You’ve done all that analysis, and that’s what most banks will look at.

I can tell you right here right now not all banks lend you the same amount of money because of their different qualification criteria and qualifications in terms of what they accept and what they don’t accept. Here are a couple of examples of how much you could borrow in terms of the lender’s eyes.

Now the first one on the left-hand side there a single person with $8,000 income, no kids, no debts, simple living expenses of $1,500 a month. Now you could borrow the most that you could potentially borrow is around $574,000. But there are other lenders that will only lend $472,000. That’s a $100,000 difference in your assessed borrowing capability from different lenders.

It really does show the difference in your borrowing capability in the lender’s assessment. The one on the right-hand side, a couple of, I should say with kids, some credit card facilities, and so forth $1,000 income for one person $8,000 for the other again you’re seeing some big differences here. In terms of your borrowing capability. Many hundreds of thousands of dollars, in this case over a million dollars.

It is important to talk to us about ideally how much you’d like to borrow, you’ve done your own budget, but all the banks lend that to you. So not all banks will lend you the same amount of money as is demonstrated by this graph in front of you.

How much do you need to put towards the property?

Well, the first thing you need is your own deposit and so forth. Now ideally, you need a 20% deposit, but we commonly find, especially with first home buyers, that that’s impossible or difficult, and it’s common for borrow first home buyers to only have five percent available. So, in other words, the minimum that’s required is a five percent deposit, and so for, therefore, the banks will lend you 95% of the value of the property. Now stamp duty where applicable. If you’re a first home buyer, what you’ll see in the tick there are some stamp duty benefits.

If you don’t qualify for the stamp duty discounts that are available for first home buyers, you will need to pay stamp duty usually of around 4-5% of the value of the property. You need to cover your solicitors and conveyances fees of a couple of thousand dollars. If you don’t qualify for any first home buyer discounts, you need a five percent deposit, and now about another 4-5% to cover stamp duty.

Let’s just run through an example here of a situation where a first home buyer is looking at buying a property for $700,000.

Now we’ve got two situations here. One is a standard situation where you’re not a first home buyer and another one as a first home buyer. Therefore, can get a stamp duty discount of about $16,000 on a $700,000 property. We’ve got a separate video and presentation available on the various first home buyer benefits that are available on our website as well. But we can definitely talk to you about what first home buyer benefits are available to you when your situation. But in this situation, you can see quite a nice saving of $16,000.

The costs involved, whether you’re a first home buyer or not, they’re pretty much the same there as well. If so, the total amount that you will require is there in front of you as either as a first home buyer or not. I am assuming here that you are borrowing 95% of the value of the property. Therefore, the lender’s mortgage insurance or LMI comes into play. We do have a separate video on that particular subject that you can view. So I won’t go into detail exactly what LMI or lenders mortgage insurance is all about, but if you are borrowing 95% or, in fact, over 80% lenders’ mortgage insurance comes into play. In this situation, it’s about $25,000 or $24,000 if you’re a first home buyer and you can borrow 95%. So the total amount that you’re needing to contribute if you are a first-time buyer is $70,000.

So like I said before, about 10% of the value of the property and a little bit more $90,000 because you’ve got to cover the extra stamp duty benefits and mortgage insurance premium If you’re not a first-time buyer. I am assuming that you don’t qualify for any first home buy grant of about $10,000 that is available if you’re buying a property that’s brand new. Unfortunately, most of our clients aren’t buying a brand new property because they’re simply not available in this price bracket in the Sydney metropolitan area. The difference is the first home buyers are about $17,000, so quite significant. But this does give you a bit of an idea as to how much you need to contribute towards your purchase. We can run through these numbers with you in terms of your situation, but this certainly gives you a bit of an idea.

The bottom line is this the minimum that you require is 5% of the value of the property. You need to cover stamp duty if applicable let’s just assuming it’s another 5%. So you need to cover around 10% of the value of the property. Lenders mortgage insurance if you’re borrowing more than 80% or have a deposit that is less than 20%, and as I said before, we do get to have got a separate lesson  on that. If you don’t have 10% percent or 20% or you did have enough to make up the required contribution, have a chat with your parents about maybe can they give you a loan or a gift or even a family equities guarantee.

We’ve got a separate video on the issue of family support that you can refer to as well. But do have a chat to your parents. Many parents these days, in these current conditions and city property prices, are prepared to assist their kids in terms of buying first property. But important for you to do your own sums in terms of making sure that you do your own budget, in terms of what you can afford, in terms of your own contribution, as I said before, work out what you can afford in terms of your rent plus your savings because that will equal effectively what you can afford. The general rule of thumb is that banks will lend you five to six times your income, and that will that is your borrowing power. Now that’s a really, really rough guide, but it just it’s a good guide to work out what you but the banks will lend you but for a more exact number.

Please talk to us so that we can run some numbers for you and work out which lenders will lend you the required amount that you’re looking at borrowing to achieve your property purchase. As always, we’re here to help you. Please don’t hesitate to reach out to us. Our contact details are here, and we look forward to working with you in terms of establishing your borrowing power. Thank you very much!

Disclaimer: The information provided on this website is for general education purposes only and is not intended to constitute specialist or personal advice. This website has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should consider the appropriateness of the advice to your own situation and needs before taking any action. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.