Find out how much you can borrow and what your repayments might be:
Before you start hunting for your investment property and the perfect home it's best to get an indication of what you can borrow to make the dream a reality.
But let's first look at everything you need to know about our home loan affordability calculator, including how it works and how it can help you determine your borrowing power.
A home loan borrowing calculator takes several important factors into account to determine your borrowing capacity or which size loan you may be eligible for.
The calculator takes into account your annual income (net salary before tax) and any other income which is then compared against your outgoing monthly expenses, number of dependents, any debt (such as credit cards or other loans) and other financial commitments.
You can then adjust the interest rate and loan term on the calculator to see how it would affect your borrowing capacity which would help to determine what type and size of loan would suit your budget and income.
Each lender calculates mortgage affordability in a different way, which means there is no ‘hard and fast’ rule to work out exactly how much you will be able to borrow until you go to apply for pre-approval with your preferred lender or preferably through an investment-savvy finance broker.
But generally, there are five key steps banks will take to assess how much you can afford to borrow.
1. Work out how much you earn
Your and your partner's annual income provides the baseline for calculating your mortgage affordability.
There are several income sources that banks will consider when calculating your overall income:
- Base income
- Overtime income: Some banks will accept all of your overtime income if it is proven to be regular and ongoing. Other banks will only accept around 50% of overtime income for assessment purposes.
- Bonuses: For a lender to include your bonus income payment, you’ll have to show a two-year history to show regularity.
- Commission payments: Some lenders will consider commissions in your gross income if it can be proven as regular and ongoing
- Any tax-free income
- Rental income from investment properties: Lenders typically use 80% of the rent income that you receive to allow the remaining 20% for costs such as property management, repairs and council rates.
2. Find out about your situation
Borrowing jointly with your partner can significantly boost your borrowing power versus if you were a single person.
Banks also ask for information about any dependents you have because dependents cost money. The more dependents you have the less a bank may be willing to lend and therefore the lower your borrowing power.
3. Calculate total expenses
Banks consider a number of factors when determining how your expenses or existing commitments may affect your borrowing power.
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- Living expenses: Grocery and petrol costs to daycare fees. Banks want to see an overview of all your outgoings to see how much ‘spare’ money is left after paying living expenses.
- Existing Mortgages
- Credit Cards: Most lenders will assess your credit cards as being fully drawn, whether they are or not.
- Personal Loans
4. Add the surplus
Some lenders also include a non-existent expense called a ‘buffer’ to ensure your borrowing power is conservative to cover any unforeseen circumstances.
5. Calculate how much you can borrow
Banks will generally then use the above information to work out how much money is remaining in your budget and available to go towards your monthly mortgage repayment.
The lender will then calculate your home loan repayment for a 30-year loan and include applicable interest rates.
Do you think your income is too low to get a home loan?
That’s a myth.
Home loan lenders don’t reject people with earnings below a certain threshold, but it will mean your lending capacity is less.
Due to the way, banks calculate mortgage affordability, as discussed above, the amount of mortgage you may be eligible for is calculated at a percentage of your income.
Sure, if you have a low income (The Australian Taxation Office classes a taxable income of under $37,000 as a low income and eligible for the full $700 income tax offset as outlined in this year’s Federal Budget, so that could be a good guide of what is considered ‘low’), your income could present issues with buying a home in today’s property market, but it’s not impossible.
In fact, some lenders have specific products available which are tailored specifically for low-income earners of single-income households.
One of the most important things you need to do when looking to buy a property is to determine what you can afford to borrow.
In reality, a home loan affordability calculator is as accurate as the information you input into it so while it does go some way to estimating your borrowing power, it should be used only as a starting point to determine whether home ownership is financially within your reach before applying for pre-approval and pursuing listings.
Whilst it is always best to speak to a professional, like the team at Metropole, this calculator is a great starting point of anyone looking to take on a new loan.