Did you know?

When buying your first property a good rule of thumb is to inspect at least 15 properties to get a feel for the market.

How Much Should I Borrow?

As much as you can comfortably repay.

It’s not that hard to work out your borrowing capacity. Every bank and finance broker has an online home loan calculator that answers the question, “How much can I borrow?”. Working out how much you should borrow can be a little more difficult.

How much can I borrow?

The factors that lenders take into consideration in determining your borrowing limit are:

Net income

  • How much do you clear?
  • Will you have one salary or two?
  • Do you have other sources of income?
  • Stability of income

Are you in full-time work?

  • How long have you been with your employer?
  • Are you self-employed?
  • Other loan repayments

Do you have a car loan? HECS debt? A Credit card debt?

  • Total credit card limit
  • A high limit can decrease your borrowing capacity
Credit history

  • A bad credit history won’t help – but you should be honest
Number of dependants

  • Do you have children?

Term of the loan

  • Are you taking out a 15-year or 30-year loan?
Interest rate

  • When rates are higher, your borrowing capacity will be lower

Debt-service ratios

In determining your borrowing limit, lenders use what is called the debt-service ratio – the ratio of loan repayments to your gross income. For single income earners, this ratio should not exceed 35%. For double income earners, the ratio should not exceed 40%.

How much can I borrow?

  • Use the MFAA home loan calculator

How much should I borrow?

While MFAA-accredited members are bound to ensure you don’t borrow more than you can service, ultimately only you can decide how much you should borrow.

What you should take into account

The lender’s main concern in determining how much you can borrow is “Can they repay the loan?”. They may not take into account a host of other personal matters – but you should. These include:

  • Income security: You know more than the lender about the security of your income. How safe is your job?
  • Family planning: You might not have children now, but are you planning to? And if so, will this mean going from two salaries down to one?
  • Job satisfaction: If you have a highly paid job, you can borrow more. But, if you don’t like your job, or it’s highly stressful, taking out a large mortgage can have long-term lifestyle implications.
  • Lifestyle: You might be able to afford to service a large loan, but only if you have no social life whatosever. You need to consider whether that’s a trade-off you’re happy to make.
  • Other goals: Property ownership has become a preoccupation for Australians. But, there are other financial goals to consider – like providing for your retirement. And money isn’t everything. Will taking out a large mortgage mean you’ll never fulfil your dreams?

Only you can decide

That’s why the question should not be ‘How much can I borrow?’, but ‘How much should I borrow?’. And only you can ultimately make that decision. To learn more, talk to an MFAA member today.

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How To Buy Without A 20% Deposit

February 17, 2016

When you consider that a small flat in Sydney could set you back half a million dollars at the moment, saving a 20% deposit to buy that flat – $100,000 – can seem an insurmountable task. That’s where insurance can help.

Lenders mortgage insurance (LMI) may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit.

What is it?

LMI protects the bank or lender, should a home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.

While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.

What’s in it for you?

For the borrower, it may seem LMI is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. In the example above, a $500,000 property, this brings the deposit down from $100,000 to just $25,000.

And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.

What you need to know

The insurance premium is generally a one-off payment, but you may be able to roll it into the loan amount so that you are paying for it month-by-month along with your mortgage.

There can be a big difference between premiums paid if you have, for example, a 10 per cent deposit saved compared with a five per cent deposit, so it may well be worth trying to gather together some extra funds, even if you despair of reaching the full 20 per cent.

An MFAA accredited finance broker is an expert on the industry and the credit market. Investigating your options and working out whether to buy now or save extra deposit is a decision that a good finance broker can help you with. Find an MFAA accredit finance broker here, and look for the ‘MFAA accredited’ sign on your finance broker’s door.

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