Congratulations you have made the decision to purchase your first home.
Now comes the tricky part. The home loan finance.
It is a very common misconception that people have: – if I am paying, for example, $400 in rent per week then can I look at taking out a loan where the repayments would be of a similar amount.
It sounds logical that if you are managing your budget putting $400 into rental accommodation then why not consider a home loan where the repayments equate to putting $400 into your very own home.
The next step you would think would be to look at your deposit and the current interest rates and go shopping for your first home. How exciting!
The basic calculator may have you thinking, in this example, you could afford a home for approximately $380,000 with a deposit of around $30,000 (to cover the required 5% deposit plus an amount for other costs) leaving a loan of around $360,000 at 4% over 30 years.
Unfortunately that is not the way the Banks looks at the maths.
Lending institutions need a certain level of security that you will be able to manage the loan repayments for the life of the home loan. Therefore the interest rate they base their calculations on includes a buffer – which at the moment means the rate used is around 7% (even though your actual rate would be around 4%).
Using 7% rather than 4% a repayment of $400 per week would only allow you to borrow $260,000 and not $360,000 (subject to meeting all the other eligibility criteria of the lender).
So even if you are currently paying $400/w in rent, a lender won’t automatically assume you can afford to pay a mortgage of $400/w – they need to assess your borrowing capacity based on all your income and commitments and then apply the ‘buffer’ to your home loan rate.
Banks are not all the same, for example:
- Some lenders are happy to waive the genuine savings requirements if you pay rent through a real estate agent
- Some lenders will consider only a portion of any Centrelink payments as income.
- They all calculate living expenses differently.
Are you spending hours googling the answer to how much you can borrow?
You should consider Us – your 'Home Loan google'.
John Kennedy, Mortgage broker and home loan specialist, for Mortgage Choice in Mudgeeraba has been on the Gold Coast for over 15 years. He and his team have the latest information and experienced professional advice you need to source the right home loan from over 20 lenders in one phone call. Contact us on 5559 2563, office is conveniently located only 5 minutes from Robina Town center in Mudgeeraba.