With low rates and a booming property market, it’s no wonder Australians are lining up to get in! So this week I wanted to share 10 things you should know before you take out a mortgage.
There are some great low rates available right now, but often there are stricter criteria you need to meet to access them. Things like a good credit score, no previous late repayments on any debts and more than 20% equity, can be important.
If you have a credit card, lenders will typically factor in about 2-3% of the approved limit – not your current outstanding balance – per month as an added financial commitment. A $20k credit card limit could reduce your borrowing capacity by around $70-$80k. That’s roughly three to four times the limit of your credit card.
Each lender will estimate a minimum amount of living expenses based on whether you’re applying as an individual or a couple, where the property is and the number of dependants you have. So even if you run a lean budget, they will use the higher of your figure or theirs to do their calculations. It is also important to note that lenders distinguish between basic living expenses and discretionary expenses – and their definitions will probably vary to yours! For example, child care fees are often counted as a discretionary expense (I can see the parents’ shocked faces from here!)
It’s important to look at your own financial capacity in real terms, rather than counting on the lenders’ assessment. Look at what the actual repayments would be at higher interest rates (say 6%, 7% and 8%) and make sure you are comfortable that you could afford the repayments.
Each lender has their own way of calculating how much you can afford to borrow. In general, they decide how much risk they are willing to take on a loan, factoring in your personal circumstances like employment, where the property is located and the type of property. And the differences between lenders can be significant.
In the current market, most lenders will assess borrowing capacity based on a 7-8% interest rate, not the 4-5% rates that you see available. They do this to make sure you can still make repayments if rates go up.
As a rough guide, a pay rise will increase your borrowing capacity by around 1% per $1,000 per annum pay rise. Play around with the Women with Cents calculator to see how your pay rise might affect you – just make sure you use interest rates of 7-8% like the lenders do! Also keep in mind that the number of financial dependents you have changes your borrowing capacity too. For each dependant, your borrowing capacity could reduce by around $30-$40k.
Before you buy that investment property, know that lenders will typically factor in only 80% of the rental income you’re likely to get. This is to account for rental expenses and vacancy rates.
Some lenders are strict on offering interest only repayments as an option where you are living in the property. So if you’re looking to switch, you’ll probably need a good reason for it, and you may be need to pay a higher interest rate too.
Many people forget that refinancing or taking out a new home loan when one spouse isn’t working, can make it harder (sometimes impossible!) to get a new mortgage. The reason is that most lenders won’t include maternity income, they will only use the income of the working spouse to determine whether you can afford the loan.
Natasha Janssens is a qualified accountant, mortgage broker and financial planner.
This post was originally published by Women With Cents, you can find it here.
