Ready to buy your dream home? With a steady income, a decent home loan deposit and no credit card debt, getting a home loan would be a breeze…
Do you know how much the banks are willing to lend to you? While getting a home loan may be easier with a fixed income and deposit, knowing exactly how much you can borrow can make the process less tedious and much faster.
So, how much can I borrow?
Banks have a legal obligation to lend responsibly. To decide what amount they are willing to lend to you, banks take into account several factors including your income, debts and expenses.
Your home loan deposit is an important factor determining the size of your home loan. The percentage of deposit compared to the total loan size will determine the LVR, an important factor used to size up your home loan and interest rate.
The other factor is your serviceability or your ability to service the home loan over its entire term. Essentially, banks want to be sure whether you can afford to make the repayments on your mortgage once you have taken care of your regular expenses or not.
Lenders use different methods to calculate your serviceability but you can always use our borrowing calculator to know how much you can afford to borrow.
How is loan serviceability calculated?
Banks calculate your serviceability by taking into account your income from all sources and subtracting your expenses and other debt commitments (including mortgage repayments) from it. While the calculation seems simple, different lenders have different criteria and here are few things you may not know:
1. All income is not same – All income including your regular salary, rental income, interest from investments, Centre link benefits and any income you earn as a freelancer is taken into account for calculating your serviceability. However, while 100% of your salaried income will be considered, only 80% of your rental income may be taken into account, as rental income is prone to fluctuations. If you freelance in your extra time, income from your second job is only considered if you have held the job for at least a year. Income from investments is also considered at a reduced rate as investments are known to ride the market.
However, few lenders are less strict while calculating your income, which can instantly boost your serviceability. A mortgage broker can suggest the right lender for your situation.
2. Banks like to build a buffer – Yes, as a prudent practice, banks like to build a margin when calculating your loan serviceability. What this means is while you may be able to afford your home loan at the current interest rate, banks want to be sure you can service the loan even if the rates go high in the future. Your loan serviceability is thus calculated on the basis of an ‘assessment rate’ that is, on an average, 2.5% higher than the market rate, making your home loan even more unaffordable.
3. Other commitments – With APRA insisting that banks lend responsibly, most lenders err on the side of caution while calculating your liabilities. So, as you amass frequent flyer points on your swanky credit card, the high credit limits (that you don’t even need) on your cards are silently bringing down your loan serviceability. Whether you have any balance on your credit card or not, lenders calculate your minimum monthly repayment at 3% of your approved credit limit, increasing your debt commitments significantly.
A line of credit loan is fully taken into account, whether it is drawn down or not. Other factors such as rentals, education loan, car loan and even number of dependants bring down your loan serviceability.
Using these figures, banks calculate your serviceability through one of the following methods:
1. Debt-Servicing Ratio – This common method that calculates the percentage of your income that will be applied towards servicing debt. We tell you how your DTI ratio affects your loan approval.
2. Net Surplus Ratio – The reverse of the above, it is the percentage of your after-tax income that will not be used for servicing debt.
3. Surplus Monthly Income – This figure indicates the amount you’d be left with every month after paying off all your monthly expenses and home loan repayment.
How to increase your serviceability?
While the strict borrowing criteria make it unaffordable to enter the mortgage market, it is possible to increase your borrowing power with some simple steps.
1) Increase your income – Stating the obvious, increasing your income will increase your borrowing power. Ask for a hike, take up a second job or take some hobby classes in the neighbourhood to supplement your income.
2) Reduce your expenses – An easier choice that takes discipline to execute, a good household budget can help you reduce your expenses significantly. We tell you some simple tips to boost your saving habits to help you in buying your property.
3) Kill that credit – From closing down extra credit card accounts to fighting debt head-on, both the moves will increase your borrowing capacity. Start by paying off highest interest-rate debts first or tackle the largest loan amount first. Use these helpful home loan calculators to calculate your repayments, set savings targets and plan a budget.
Another way to improve your serviceability is to choose a low-interest rate home loan that you can find by comparing home loans online. HashChing offers competitive home loan options and lowest home loan rates in the market through broker pre-negotiated home loan deals, ensuring you get the maximum out of your home loan.
By Vidhu Bajaj