If you’re getting ready to jump into the property market, either as a first home buyer or maybe an investor, you’re probably now wondering how much money you’ll be approved to borrow.
When assessing a borrower’s capacity to pay back a home loan, lenders don’t just take into account your current salary. They also look at things like your savings history, credit score, expenses, as well as other assets or liabilities you have.
Interest rates are at an all time low right now which is great news for you as it will mean lower home loan repayments, but it is a good idea to resist the urge to use this as an excuse to extend yourself financially and borrow more money than you actually need.
Here are a few things you also need to consider when taking out a home loan.
What goes down, can go up!
According to our research team at Mozo.com.au, the average variable home loan rate has dropped by nearly 1% in the past year, but that doesn’t mean it couldn’t go up by just as much, if not more, in the next year!
Variable rates are just that - variable, so make sure you’re not banking on lower interest payments to help you cover a larger principal amount. Before you take out a home loan with a particularly low interest rate, use a borrowing power calculator to work out what your repayments would look like if your interest rate went up by 0.25% p.a., 0.50% p.a. or even 1% p.a.
Of course you can always opt for a fixed rate loan for an agreed period of time, but just keep in mind this will revert to a variable rate after 1-5 years.
Save, save, save for a deposit
How much of a deposit you can put down will often be the first indicator to your lender of how good a saver you are. So if you have a smaller deposit saved, then your lender may restrict the amount you can borrow.
20% is generally the standard minimum deposit recommended for a home loan, but there are options if you don’t have this amount saved. If you do put down a deposit of less than 20%, you’ll have to pay lenders mortgage insurance, unless of course you are eligible for the government’s First Home Loan Deposit Scheme.
Check your credit rating
Another thing that will affect just how much borrowing power you’ll have is your credit score. What your credit history looks like - i.e. whether you’ve missed bill payments in the past or whether you have outstanding balances on credit cards, will demonstrate to a lender how reliable you are as a borrower.
Whether your credit score is excellent, good, above average or average can also determine what kind of interest rate you will get and how much you can borrow. Generally if you have a credit score lower than 509 you will find it difficult to be approved for a home loan.
There are a number of things you can do to improve your borrowing power before you apply for a loan. This could include opening a high interest savings account to start building up money for a deposit or learning how to improve your credit score.
Don’t set and forget
Once you’ve got our home loan it's important to stay loan savvy. Just as interest rates change so will your needs as time goes on. Be sure you do a home loan health check every 12 -18 months to make sure that you are using the loan features you’re paying for and if not, switch to a loan that’s cheaper or has more flexibility for the stage of life that you’re in.
About the Author
Director at financial comparison website mozo.com.au, Kirsty Lamont has nearly 20 years of experience in the financial services industry. Kirsty is passionate about using her knowledge to help Australians make more informed decisions about what they do with their money. You may recognise her from TV spots and news pieces, where she can often be seen providing commentary on the latest in everything finance-related from home loans to car insurance.
Qudos Mutual Limited trading as Qudos Bank ABN 53 087 650 557 AFSL/Australian Credit Licence 238 305. The information in this article is of a general nature and has been prepared without considering your objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances.
Loans are subject to approval. Normal lending criteria, terms and conditions and fees and charges apply. Mortgage insurance is required for home loans over 80% and is subject to approval.
Before opening an account with us, you should read our Terms and Conditions for Savings Accounts and Payment Services and Financial Services Guide.
Published June 2020