Home Loan. How Much Can I Borrow? Probably lots more than you think... (especially for investment property!)
How Much Can I Borrow? So you want a home loan, investment loan or just want to know how much your good for?
It's a question that you must have answered before you go shopping for your piece of real estate. Not only will it give you a targeted choice of properties, but it will give you a strong platform for negotiation with a prospective seller in knowing what you can and cannot do financially.
Your Borrowing Capacity and Security Calculations
In applying for a loan your broker will need to access among other things, your borrowing capacity to meet repayments on your expected loan and the value or size of deposit or Security that you will provide for your loan that the lender will consider giving you the loan against.
The lower your loan to value ratio or LVR the better the answer will be to 'How much can I borrow'. (A good deposit gives the lender some faith that they can recover the money that they lend you should you default on the loan.)
Your Security therefore is your Loan to Value Ratio (LVR)
This is another vital componant to ascertaining the answer to your question of how much can I borrow. Loan to value ratio is the percentage of how much you have borrowed or would like to borrow, to how much you own, and is often expressed as LVR.
The bank requires security from you for any property purchase. A security deposit for an investment can be provided by cash or by offering security of the equity owned in another property. The equity in a property will be established by a registered valuation of your property.
While home loan security can go as high as 95%, Banks normally require a minimum deposit of 10% of purchase price.
As well, you will also have to pay for the costs associated with purchase. The costs in purchasing a property are things over and above the purchase price like stamp duty, bank valuation fees, legal fees etc. These costs average about 5% of purchase price and are inclusive to your, 'How much can I borrow', question.
Therefore, a 10% deposit would see the purchase of a $300,000 property require a minimum deposit of $30,000 plus costs.
Your LVR on this property is calculated by dividing the total of your loan by the value of your security and then multiplied by one hundred to obtain a percentage.
So, 'how much can I borrow', or rather' what is the LVR componant using this calculation?
The $270,000 loan is divided by the $300,000 security of your purchase x 100 = 90% LVR
An LVR above 80% will attract Loan Mortgage Insurance (LMI) of between 0.4% to 2.5% - (some times more) of the loan size; depending on lender and borrowing circumstances, plus State LMI Stamp Duty of approximately 10%.
Your capacity to meet loan repayments
Your capacity to meet repayments is the other 50% to the answer of 'How much can I borrow' and can be calculated in two distinct ways.
Debt Servicing Ratio (DSR) - A DSR establishes what percentage of your income will be used to service debt including your current and proposed debt and living expenses.
While the DSR calculation can use both net and gross income, the normal for most lenders is to use your Gross income. This calculation can use Gross annual or monthly figures. A DSR ratio of LESS THAN 35% is the ideal. However another calculation method could also be used.
Net Surplus Ratio (NSR) - The NSR establishes what percentage won't be used to service debt having allowed for your current and proposed debt and living expenses.
A NSR calculation could be used in a situation where as a high income applicant you could possibly exceed a normally acceptable DSR percentage of less than 35% but still be quite comfortable to meet repayments due to a high net surplus.
Your capacity to meet loan repayments however, starts with accessing your total income and expenditure from all sources.
All personal and property loans
Credit cards and
Stipulated or stated living allowances
Credit cards are assessed as having a repayment commitment based on 3% of your total credit limit per month, irrespective or the actual balance outstanding.
Living allowances, unless you can prove otherwise, are given the following approximate values for individuals, partners and dependants:
Single income - $10,100
Single income plus 1 - $12,800
Single income plus 2 - $14,500
Single income plus 3 - $16,300
Single income plus 4 - $18,100
Joint income - $15,200
Joint income plus 1 - $17,700
Joint income plus 2 - $19,500
Joint income plus 3 - $21,300
Joint income plus 4 - $23,000
The first and major income source if you are like most people, is your main Wages/Salary/PAYG income.
Lenders usually accept 100% of this figure with their emphases placed on a track record of 6 months or more.
Other income sources like second jobs or family allowances are also important but only to varying degrees. A full assessment will consider the following:
Bonuses suggest that this form of payment is spasmodic or ureliable. A lender will want to know that these are regular possibility or part of a pay structure and that you have received these bonuses over the last two years.
Because business owners are sometimes creative or need to leagally minimize their tax liabilities it can sometimes be hard for them to justify a given amount of money that they actually source from their business. A lender will need to see that you have drawn an amount of income out of th ebusiness and paid tax on that income before accepting it for assessment purposes.
Your business losses should be deducted from your gross income unless it can be shown that the loss was a one of and your normal or greater business profit is likely to return.
While casual employment generally attracts slightly higher paid per hour rates it is also considered casual and therefore not a reliable source of income. You will need to prove that this is an established source of income before a lender might consider up to 50% of it for assessment purposes.
Dividend income from shares or Royalties
Like interest, it will only be considered if you can show that dividends have been regularly paid over 24 months. It is assessed on a case-by-case basis however total acceptance for the full amount is rare because of the volotility and unforseen variences and reliability.
Some lenders will accept this payment if the child is under 12 years of age and the payment is expected to continue for the next 4 years. If rental assistance is paid it is first deducted from the family allowance prior to calculating serviceability.
If you have interest income that has been regularly paid over 24 months, up to 100% will be considered as income.
Maintenance - Child Support
Child support is not accepted by most lenders. If by chance it is, most lenders will require that the payment allowance is for a child or children under the age of 10 years and that such payments supported by a court or Child Support agency. Regularity of payments also need to be shown.
It is only then that 50% of this payment may be considered.
The deductions of negative gearing can be substantial and the tax deductions of your property investment can be gained on a weekly basis to greatly assist cash flow.
However only a few lenders will accept the tax deductions that negative gearing provides and consideration for such strategy is evaluated on a case by case basis.
Much like second jobs your overtime will have to be shown to be a regular occurance providing a regular amount of over time income. Again, only 50% will be accepted as a source of income for assessment purposes.
This is a very accepted form of income. Lenders know that the running cost of a rental property which includes rates, maintenance, agent fees, vacancy rates etc should average approximately 20% to 25% of rent return.
Therefore they will only assess your total income from rental property at 80% maximum and very often as low as 60%. You must supply a formal lease agreement, last 2 rental statements or a letter from the Real Estate agency that is managing your property as to the expected rental return of the property if it is currently vacant.
Second jobs are a great source of your cash flow and can mean the difference between loan approval or no loan approval. and while most lenders accept second jobs it should be realised that you will have tohave held this second job for 12 months or more and only 50% of your icome from it will be accepted as a contribution to your total income for assesment purposes.
Superannuation is a very stable source of funds and lenders usually accept up to 100% for the nominated payout figures.
While some recipients of such payments consider them as income, the reality in a lenders world considers such payments as benefits not income and are therefore not considered.
A Debt Servicing Ratio (DSR) calculation is calculated thus:
All monthly payments x 100 divided by Gross monthy income = DSR
All annual payments x 100 divided by Gross annual income = DSR
Using the following figures and answering the question of 'how much can I borrow' in example form - this would calculate as:
A) Home loan payment (monthly) = $ 1000 annually = $12000
B) Personal loan (monthly) = $ 300 annually = $ 3600
C) Credit card = $ 250 annually = $ 3000
D) Income Gross (Monthly) = $ 4833
E) Income Gross (annually) = $58000
Monthly: A) $1000+B)$300+C)$250=$1550 x100= 32 %(DSR)
Annually: A) $12000+B)$3600+C)$3000=$18600 x100= 32 %(DSR)
A Net Surplus Ratio (NSR) calculation is calculated:
Total all outgoings divided by Total net income x 100 = NSR%
Calculation guidelines are:
1. All income from applicants is net
2. If the variation between one years income to the next is more than 20% use the lower
3. If the variation between one years income to the next is less than 20% use the average
4. Use 3% of total credit card limits
The lower the final NSR% the better. 85% is accepted by most lenders.
So, have you calculated the answer to your question of 'How much can I borrow?'
There is an easy way or course. Simply select a mortgage broker and ask the question, 'How much can I borrow', and you will have your answer in a flash.
I will discuss mortgage brokers a little later. And yes while they are very good at organising the best deal and loan product for you, their excellent and quick at answering your question of, 'How much can I borrow?'
'I have used my mortgage broker, very often just over the phone to crunch my numbers and have found her to be almost worth her weight in gold when I needed to know my exact financial position and possibilities on the spot.'
So from my mind I can only recommend that you take the leg work, guess work and stress out of your finance and call or find yourself a trusted broker today. And their services are free!
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