The amount of home loan that you can borrow from a bank can be different from the amount that you’re capable of paying.
Think about these things before applying for a home loan:
1. Compute the amount you can afford
Note your monthly income then list all your expenses to give you an idea of your monthly expenditure. That will then give you an idea of how much is left that could be used to pay off a mortgage.
Factor in an allowance for unplanned expenses and interest rate changes.
Personal debt and the right type of loan also needs to be taken into consideration.
- Income – Follow this general rule: repayments should not be 35% higher than your gross income.
- Expenses – Take note of your present and future expense, taking into account factors such as having children, and the financial impact of unforeseen happenings such as a job loss.
- Loan – Your monthly mortgage repayments will be determined by your loan amount, so beware of overextending yourself. The larger the deposit compared to the amount borrowed, the smaller the repayments will be. Calculate how much your monthly repayment will be using any online home loan calculator.
2. Ensure you meet the lending requirements
Different banks, different lending requirements. They will depend on things like the economic situation and how big or small the institution is.
Here are the common criteria:
- A minimum deposit according to the loan-to-value (LVR) of the loan. LVR is the amount of money you can loan compared to the property’s value.
- Employment status and present income.
- Credit card limits and personal debts.
- Savings history or past repayments history for other loans.
3. Keep in mind the various fees and charges
Each of the loans available to home buyers come with their own respective fees and charges, including Lenders Mortgage Insurance, service fees and fees for various features.
- Lenders Mortgage Insurance (LMI) is a fee paid to the bank when the deposit is below 20% of the purchase price.
- Service fees vary in every institution. They are intended to cover the cost of servicing the loan. Hire a legal adviser to go through the mortgage contract as they can tell you which charges are standard and which ones you should not pay.
- Special features of different loans can include more fees or variable interest rates. For instance, the rate is higher for offset and redrawing accounts than it is for a standard home loan.
- Related costs can include the amount you have to reserve for conveyancing, home and contents insurance and stamp duty. Don’t forget to consider these costs when buying your new home.
4. Consult a mortgage expert
Your financial situation will determine how much a bank will lend you.
Meet with a financial advisor to know how your home loan will affect your overall finances, and a mortgage broker to find the best deal on a home loan.