There are a number of factors that will determine the amount you can borrow for your home. Before commencing the search for your ideal property, you will need to get an accurate idea of how much money you have to work with.
Your bank or credit provider is taking a calculated risk every time they lend money. In order to minimise the risk they will require proof of your ability to repay the loan, and an up-front deposit to protect themselves against any loss if the loan is terminated early.
Your home loan borrowing capacity
As the borrower, you will need to understand your borrowing capacity. This is an amount that you can comfortably repay according to your financial situation. Calculations that determine your borrowing capacity are easy to make by using an online calculator. Your lender will require documents that verify your calculations before commencing with the loan application and approval.
Your borrowing capacity will take into consideration:
- Your annual income
- Monthly expenses
- The type of property
- The loan term (duration of the loan repayments)
Most banks and credit providers work on the principle that your repayments are no more than a third of your gross salary.
Approval on principle
You may have already started to search for a new home, but still have no idea when to apply for a loan or how much to ask for. Your loan calculations will provide a guideline for getting a conditional approval (approval in principle) from your bank. The approval in principle will assist in a couple of ways:
- Real estate agents will treat you as a serious buyer
- You will understand exactly how much you can borrow and the deposit required
Approval in principle is usually valid for three months, giving you time to look around and investigate potential properties. Normal lending criteria is taken into consideration for final loan approval even if it has been approved in principle. You will require up-to-date documents that verify your income. Identification and credit checks are also a part of the process.
Applying for a home loan
It’s a good idea to know who you are dealing with when borrowing large amounts of money. For this reason, most borrowers prefer to interact directly with their bank manager or representative. If you are taking out a home loan for the first time you will surely have questions that are best answered in person. It’s important to fully understand your loan and any conditions that are attached to it.
In many cases, you can also apply for a loan online. It is simply a matter of providing your bank or credit provider with all the requested documentation, and they will consider your application and let you know if it has been successful. You can also call your bank over the phone and make some initial enquiries that will help you determine the best way forward.
The more you pay as a deposit on your new home, the less you will need to borrow. Saving a larger deposit can give you more flexibility of choice, either by purchasing a more expensive home or by making your repayments a smaller percentage of your income. A loan term of 25-30 years is quite a large chunk of time, and nobody wants to be stretched financially over such a long duration.
If your present rental or living situation is comfortable, and your savings are building nicely, it’s worth considering keeping your home buying plans on the back-burner for another year or two. A larger deposit will also prove to your lender that you have good money management skills and the restraint required to make regular loan repayments.
Your lender will generally expect your deposit to amount to around 20% of the house price. If you take out loan insurance (an extra monthly expense) the lender could allow you to borrow up to 95% of the house price.
The information in this article is a guideline only. Contact your preferred lending institution for further information.