I guess it comes as no surprise that I get asked this question almost every day. Do you know what my standard answer is?
Well, that depends ……
“OK, just give me a ball park figure”.
Well, that depends ……
“On what??”
Well, on a bunch of things ……
It’s frustrating for some people – they just want an immediate answer – Yes or No,
How much, Right Now!!!
I wish it was that easy folks!
Here’s a basic list of things that influence how much you can borrow:
- Income In
- Expenses Out
- You and Your Credit record
- What security is on offer
That’s the key things that influence your Borrowing Power.
Read on if you want more detail. If you’re not a detail person, well, that’s the Executive Summary.
If you want us to assess your Borrowing Capacity, please get in touch, and we’ll ask you a bunch of questions to get the information we need to provide you with a fairly accurate range (amount varies from lender to lender, that’s why there’s a range).
Call us on 1300 651 363 or email loans@homefinancehub.com.au
But I threatened you with more detail, so here it is!!!
Income In
Well obviously, how much you earn is one of the critical factors in determining borrowing capacity. So, the things that this factor takes into account are:
- Wages/Salary
- Self-employed income
- Rental income
- Other investment income
Just be aware – if you are a wage or salary earner, different qualification periods exist for different types of employment. For example, if you are a contractor, most lenders prefer you to be in the role for 12 months (or have a minimum 12 month contract).
Also, if you keep switching jobs – you’ll struggle to get anything over 80% lending margins because mortgage insurers require 6 months minimum in a position. You need to demonstrate employment stability if you want someone to lend you a pile of money.
If you are a casual employee – expect to be required to provide 1 – 2 years’ worth of income history to prove the consistency of your income.
If you are self-employed, normally your business will need to be registered for at least 2 years and you have at least one year’s full tax returns and business financials to do a full-doc loan.
Low-doc loans, well they’re a different kettle of fish – requirements vary, but they are not “No-Doc” loans anymore – you need to provide evidence, whether that’s bank accounts or tax records/BAS and a letter from your accountant. AND – maximum loan in low-doc loans is 80%.
Rental income is easy to prove – just a statement from the managing real estate agent. If you manage it yourself, you might need to provide 6 months of bank statements showing the income as well as a copy of the lease.
Investment income is usually required to be supported by 2 years of tax returns.
And Remember, if the Tax Office can’t see it, it doesn’t exist.
In summary – lenders require a lot of visibility around income now. Gone are the days of a signed declaration and then the keys to the McMansion are yours!
Expenses Out
So, what does this include …???
- Rent
- Living expenses
- Loan payments
- Credit card limits
- Salary sacrifice payments
- Number of Dependents
All this gets included in determining if you earn enough money to service a loan. But things are treated a little differently than you might expect ……..
Rent is pretty straightforward, but Living expenses are often based upon a standardised measure which takes into account where you live, how much you earn and how big your family is. Regardless of what you declare your living expenses to be, they will use the higher of the declared amount or their own measure. Many lenders now require copies of your bank and credit card statements to assess your spending patterns.
Loan payments are usually “sensitised” – meaning that they allow for repayment at a higher rate for when interest rates go up. Most lenders will do this on both existing loans and proposed loans, and if you have a loan which is interest only, many lenders will look at it at a higher rate on principal & interest repayments to see if you can repay that. This reduces the amount that you can borrow substantially.
Credit card limits are a big trick too. Lenders take 3% of the LIMIT as the repayment amount. They treat it on a worst case basis. For a cardholder with a $20k limit, that’s $600 a month in repayments. Unless you pay it off in full each month, the whole of the limit is taken into account. That can make a difference of $80k in your borrowing capacity.
Another thing that is coming up a lot for me when talking to salaried professionals are their salary sacrifice arrangements.
If you have a car lease (or two) being taken out pre-tax and then an additional amount for running expenses being taken out of your pay post-tax ALL of that is treated as the equivalent of loan commitments. I recently reviewed a proposal for a client – and the two $50k cars that they had were reducing their borrowing capacity by about $250k. They were saving $5k a year in tax, but probably paying more in outgoings than if they had just bought them outright.
Salary sacrifice is sold well, but they assume the only thing you want to do is save tax – which might not be true. It may stop you in investing in something productive.
You and Your Credit Record
Your credit record is key – not so much in terms of your capacity to repay, but rather as an indicator your history in willingness to repay, and on time.
Some lenders will lend to people with credit infringements – most won’t, and usually the rates are higher and you need to have more “skin in the game” than an unimpaired loan.
What is also important is YOU. Many banks have changed their willingness to lend to foreign nationals due to a heap of fraudulent loans, so if you are a foreign resident, it’s very hard to get a loan – and income verification protocols have been raised to ensure the banks can conduct proper due diligence.
The type of Visa you have is important if you are a temporary resident. Check with us about what is possible for your situation.
What Security is on offer
There are two parts to this.
- How much cash/deposit do you have?
- What type of property do you want to buy?
How much cash you can put down makes a difference to how much you can borrow. You can have a borrowing capacity of $1 million, but if you don’t have any funds for a deposit – you can’t actually borrow anything.
Certain types of property are “on the nose” – especially high rise apartments in some areas, and other types of “residential” property – such as multi-room student houses and boarding houses – are treated as commercial properties and will only lend to 60% or 70% of the value.
There are also restrictions in certain areas (e.g. mining towns) where the property market is perceived to be higher risk.
There are lots of things to be aware of in respect of every aspect of borrowing capacity and indeed lending in general.
If you need assistance navigating your way through any of that, we are more than willing and able to assist you.
If you’ve read all the way to the bottom of the detail – Congratulations, you’ve received more information than most, and Welcome to the credits!! (Send me an email – loans@homefinancehub.com.au to ask for your free copy of “The Richest Man in Babylon” Ebook as reward for your diligence!)