How lenders work out whether you can afford a loan

July 12, 2016
Nicholas Dennett

Different lenders use different formulas to work out how much you can
borrow, but the biggest loan isn’t always the best idea.

Being able to secure your ideal loan amount can seem like a battle of
balances. Once you’ve worked your budget and finances through a
spreadsheet, there’s still the one issue left to deal with: assessment
rates. This is also known as an ‘interest rate buffer’.

Getting in while the going’s good and securing your loan while
interest rates are low doesn’t change the fact that lenders are
compelled to ensure that you will be able to make repayments if
interest rates fluctuate.

Matching the features of a loan to your financial position is
important, and often requires a third-party expert to help guide you

“What is very important is that people understand the ramifications of
exposing themselves to debt,” says Andrew Crossley, Homeloans Business
Development Manager and best-selling author of Property Investing Made

“When modelling costs, an adviser would be wise to be very
conservative in the figures they are using.”

Assessment rates add a margin to the variable or fixed interest rate
of your loan. The assessment rate provides added protection that you
will be able to repay your loan when interest rates rise, because they
are sure to rise and fall throughout the life of your loan.

“APRA is clamping down on lenders exposing people to too much debt and
not preparing them for interest rates as well as they could have,”
Crossley says.

The assessment rate can be anything from 1.5-2% above the variable
rate, depending on the lender, and many are currently using rates of
approximately 7-8%. Mortgage assessment rates vary from lender to
lender, which is why different lenders may offer people in the same
financial situation different loan amounts.

In some cases, the difference in loan amounts offered by different
lenders can go into tens of thousands of dollars, but the biggest loan
isn’t always the most suitable. Ensuring that you can pay your loan,
whether rates stay low or rise, requires a bit of know-how. Speak to
our Mortgage Brokers to find out more.

Posted in: Home loans

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