Buying a home - Essentials to borrowing money
Buying a home will probably be one of the biggest and most expensive decisions in your life. It can be stressful and take hours of research, planning and discussing, with lots of this ending up with intangible results. Before you even look for a property or what government schemes you may be applicable for, it is important to understand who will be able to help you.
One of the major parts of buying a property is obtaining finance or finding a bank who will lend you money. This will always be essential unless you have sufficient cash to buy outright and should be your starting point. There are two common options here – engaging a mortgage broker or approaching banks directly. Generally, both will be at no cost/fees as there are commission structures in place, but obviously banks will prefer to push their own products whereas independent brokers have a diverse panel of lenders they can choose from for an option which will be in your best interests. Brokers may also provide more detailed advice and can often get a better rate as they have options to choose from.
How much can I borrow?
If you have absolutely no debt and full-time permanent income, the rule of thumb is to multiply your income by 7 to calculate your borrowing capacity. You can also use many calculators online for a quick estimate to your borrowing capacity, but we strongly suggest you to contact us as the online calculator does not take into account lots of factors that could result in a decline, like the property type you are looking to buy or the stability of your income and expenses. Conversely, we may be able to pick up other parts of income to be included or give quick tips on improving your borrowing capacity (like reducing your credit card limit).
What is my maximum purchase price?
Your purchase price is a combination of your savings and the amount you can borrow. A common term you will find discussed is the Loan-to-value-ratio, or LVR. This measures the amount of debt divided by the property value and is a risk factor that all lenders will use. E.g., A property that is worth $500,000 with $400,000 of debt would be 80% LVR and would obviously be a larger risk to the bank than if there was debt of only $100,000 or 20% LVR. The industry standard is that you should have a 20% deposit for your property as well as enough cash to pay stamp duty and fees. If you wanted to buy a $1 million dollar house in NSW, this means you need a deposit of $200,000 and have an additional of at least $45,000 to cover stamp duty and fees. If you are a first home buyer, you may be subject to stamp duty exemption or discounts.
LVR becomes most important in association with Lender’s Mortgage Insurance (LMI). The general idea of LMI that you are paying for insurance to protect the bank from high risk, or high LVR. Most banks will start charging LMI for any transaction above 80%LVR, and may lend up to 90-95%LVR with LMI. Once again, there are calculators you can use to estimate the costs of your LMI (e.g. Genworth), but we strongly suggest avoiding this where possible as it is an expensive option that can often lock you in and limit your options in the future.
We suggest you to contact us so we can help you calculate your borrowing capacity and maximum purchase price. We are independent brokers with a variety of banks and lenders on our panel and would love to apply our expertise and passion to help you see what options are available.
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