“How much can I borrow?” is a standard question for many prospective residential property purchasers. The starting 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 in your current job matters, even how you earn your income: Base wages, overtime, penalty rates, commission, independent contractor, self-employed, rents, dividends, child maintenance.
The bank ‘assessment’ interest rates used in their calculations will be higher than the actual interest rate payable. They will add a margin when assessing serviceability, to make allowances for future interest rate rises, they will also assess based on you paying the loan off in its entirety (P&I 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 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 want 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.
These multiple variables mean that there are many answers to the “how much can I borrow” question. A good broker will work through the options with you to provide the best outcome, but remember an assessment is done based on your financial history and position measured at a moment in time. It is to your advantage to prepare for that well in advance.