When thinking of buying a new home, especially for a first home buyer, it is crucial to borrow responsibly and within your means. Overcommitting to a loan will mean compromising on lifestyle. A mortgage should not strain your finances, which is why we have created a handy guide to help in securing a realistic home loan.
Your borrowing power is determined by a few factors:
1. Your income
Your income is a crucial contributor to your borrowing power. A lender will want surety that your income is secure and dependable. Generally, banks will calculate your lending capacity by subtracting expenses from your net income.
2. Other financial commitments
When a lender is considering your home loan application, they will deduct any liabilities from your income, this will affect your borrowing power. These financial commitments might include:
– Car loans
– HECs debt
– Credit card limits
– Personal loans
To determine your borrowing capacity, your lender should also scrutinise your ongoing lifestyle expenses. This will include the number of dependents in your family, in addition to:
– Mobile phone plans
– Gym memberships
– Additional cars
Possessing assets (such as investment properties, superannuation or cars) might improve your borrowing power.
So, how much should I borrow?
Just because you can borrow up to a maximum amount, does not necessarily mean you should. To avoid mortgage stress, it is advised that you do not use more than 30% of your pre-tax income on home loan repayments. It is important for a first home buyer to reduce their risk and ensure that their finances could cover any repayments should their circumstances change. Specifically, consider the potential for rate rises or job loss to impact your capacity to meet repayments. Many lenders will also enforce a buffer, ensuring that you have money left over (after living expenses and repayments) to accommodate for any situational changes.
Some additional questions to ask yourself
How much debt can I handle?
Committing to a mortgage should not mean compromising on lifestyle. Spending any more than 30% of your pre-tax income on a mortgage might tip you into the ‘mortgage stress’ category, wherein families struggle to meet ongoing expenses such as utility bills. Before borrowing the maximum amount, consider the aspects of your life that you are willing to sacrifice. If you still want to eat out and take your family on holiday, it might be useful to opt for a smaller loan.
It is important to factor in potential rate rises and the impact they will have on your loan. If the RBA increases rates, will you realistically be able to make your repayments? To help mitigate this risk, ensure that you could handle a potential rate-rise of up to 2% on your current home-loan or organise a fixed interest rate.
Are kids in your pipeline? Could your financial and family circumstances shift from a two-income household to a single-income household with dependents? As a first home buyer, this is something to consider before taking out a home loan, as a mortgage is a long-term financial commitment.
With a little planning and the right advice, the task of acquiring a home loan and building doesn’t have to be stressful! Book a call with our team of experts or call 1800 184 284 to get started today!