Factors that should be considered when borrowing for home loans.
Normally, banks err on the conservative side when determining how much to lend to a client. They must also consider the best ‘business interests’ of the bank, are you a good credit risk. All the while ensuring that you are capable of making the monthly repayments on your home loan. In other words they will take an objective view of your home loan application. Now, there are a number of factors that will determine how much you can borrow from your home loan to buy a certain property.
It is best to know what these are so you know how much you can borrow for your home loan. These factors are:
* Your income and commitments
* Your lifestyle and living expenses
* Your property
* Your loan interest rate, the term and type
* Any assets you offer as security (for example, another property)
* Your credit history
1. Your income and commitments
Before going ahead with a loan, it is important to have your repayment capacity assessed. If you are applying for the loan jointly with another person, your repayment capacity may be greater, which can mean greater borrowing power. Your commitment level takes into account all debts currently outstanding, including credit and store cards, personal loans, and car hire purchase or lease agreements, and any other ongoing payment commitments. The important thing is you are also going to need a deposit. Depending on where you bank you will need between 5% and 10% of the price of the property. If you have a larger deposit you are in a better position with the bank to have your loan approved.
2. Your lifestyle and living expenses
You’ll need to take a close look at your living expenses, to ensure you can realistically afford the repayments and maintain a standard of living you are comfortable with.
3. Your property
The amount you can borrow depends on the value of your property. This value is determined by your lender, and is not necessarily the advertised or purchase price of a property. It is unlikely the property value would come in at a higher amount than the contract price, but it can and does come in lower. If it is significantly lower usually but not always over 10% the bank will reconsider their position as to whether to advance the money or not. While this may seen disappointing as it could be the house you have your heart set on. A good way of looking at is if the property is valued at less than you have agreed to pay for it the you are paying too much in the current market.
4. Your loan interest rate, the term and type
The amount you can borrow may also depend on the interest rate and the term of your loan. The lower the interest rate, the lower your repayments will be. A longer-term loan will mean lower repayments, while a shorter-term loan will save you on interest over the life of the loan but give you higher repayments as well. You need to think carefully about what is most important to you.
5. Any assets you offer as security
The more security you offer for the loan the better position you are in. If you have other property/ies you can use the equity in these to secure the new loan. If you are just starting out then you will need to do a detailed list of all assets you have this can include but is not limited to jewelry, motorbikes, caravans, superannuation, shares and investments etc.
7. Your credit history
Your credit history is also very important and will be checked by a lender when assessing your loan application. It takes into account your previous record of repaying loans and credit cards.
If you are unsure about your credit history, it is worth checking before applying for a loan. From there, you can take steps to improve or correct it if necessary - for example, by clearing an unpaid debt. To obtain a copy of your credit reference report, you can contact Veda Advantage Ltd at the following address:
Public Access Division
Veda Advantage Ltd
PO Box 964
Ph: (02) 9464 6000
If you want to know more about other information regarding how much you could borrow from your home loan and documents that it needs, feel free to email Julie@novastarfinance.com.au