Video: How much can I borrow without breaking the bank?

When I started researching buying my first home – the reality of what I could afford to borrow was far from what I’d dreamt of – but it was an important first step down the road to home ownership.

Before you can start looking at purchasing a home or applying for a home loan, you need to work out what you can comfortable afford to borrow – without stretching your budget too far. It’s important that you don’t jump in, eyes closed, or your mortgage repayments could turn into your personal nightmare.

How much can you afford?

Just because you get approval to borrow a huge sum of money, doesn’t mean you should.

You mortgage lender is going to look at your income, household expenses and personal debt to assess your borrowing capacity – so it’s important that you do the same. Make a list of your current and future expenses. Don’t forget to factor in future plans, such as having children. Will you or your partner be taking maternity or paternity leave? Can you still afford to make your repayments if someone becomes ill or loses their job?

Luckily there are plenty of tools available online that lift the screen and reveal what your home loan repayments are likely to look like before you sign up for a mortgage.

Using a home loans calculator, you can do your own calculations at home so you are armed with all the information you need to know about how much you can afford to borrow, how much interest you are going to incur, the length of loans available and what you will be forking out each month.

The loan amount will dictate your regular mortgage repayments so it’s important you don’t borrow more than you can afford to pay off regularly.

Go to the RateCity home loans calculator page now to start comparing loan amounts, interest rates and repayments.

Will your bank lend you money for a home loan?

The lending criteria for a home loan are the conditions put in place by your lender which specify whether you are eligible to apply for a loan.

The criteria will be different for each financial institution and will depend on a number of factors such as the economic market, the size of the institution and what products they offer.

Some of the common lending criteria are;

• A minimum deposit amount required based on the loan-to-value ratio (LVR) of the loan. The loan-to-value ratio is what percentage of the purchase price of the property you can borrow and how much deposit is required.
• Your savings history or previous repayments history for a certain amount of time.
• Your employment status, history and how much you earn.

If you meet the lending criteria, your lender will then calculate how much you can afford to borrow. It is then up to you to work out how much you can comfortably afford to make in repayments. Don’t overstretch yourself and make sure you factor in interest rate rises.

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