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Embarking on the journey to purchase your first home can seem like navigating a labyrinth, particularly when it comes to understanding the financial aspects.
The most important thing to grasp? It’s not about the number of properties you’ve visited, or how many property reports you downloaded, or even how many auctions you’ve attended – it’s about knowing your borrowing power. It’s crucial to save you time and stress on the property-purchasing journey.
Also called ‘borrowing capacity’, ‘borrowing power’ refers to the amount a lender is prepared to let you borrow. Pretty straightforward forward right? Not always.
As well as looking at things like the income, expenses, debt-to-income ratio and credit history of the loan applicant each lender has their own rules and risk appetite that help them decide how much they would be prepared to lend, so it’s important to prepare yourself with this in mind.
Knowing how much you can borrow will not only help you set realistic expectations but also enable you to make informed decisions throughout the home loan process. The list below explores the 5 fundamentals of understanding your borrowing power, to help you feel confident as you journey towards owning your own slice of paradise.
- Know Your Financial Situation:
Before applying for a home loan, take a close look at your current financial situation. This includes tallying up your monthly income, outgoings, and any outstanding debts you may have. Understanding these factors will not only give you a clear picture of your financial health but also help you figure out how much you might be able to borrow. Remember, it’s essential to be realistic to avoid any unwelcome financial pressure down the line.
For example, if your monthly income is $5000 and your expenses (including estimated mortgage payments, bills, groceries etc.) come to $4000, the remaining $1000 could potentially be put towards mortgage repayments. However, always consider possible future changes in circumstances and aim to keep a safety buffer.
Lenders will be interested in things like your income, any savings or equity you may have, and the size of the deposit you’ve saved. They use this information to assess your borrowing power, so it’s vital to have these figures handy.
- Your Credit Score Matters:
Your credit score plays a significant role in determining your borrowing power. Lenders use credit scores as an indicator of your creditworthiness. A higher credit score generally means a lower interest rate and more favourable loan terms. Check your credit report for any errors and take steps to improve your credit score if needed. By maintaining a healthy credit history, you can increase your chances of securing a larger loan amount.
- Understand Loan-to-Value Ratio (LVR):
The Loan-to-Value Ratio (LVR) is the percentage of the property value that you can borrow. For example, an LVR of 80% means you can borrow up to 80% of the property’s value, while the remaining 20% will be your deposit or equity. Keep in mind that a high LVR might require lender’s mortgage insurance (LMI), which is an additional cost. Understanding your LVR will help you determine how much deposit you’ll need and the available options for financing your dream home.
4. Research Your Options:
Explore the different types of home loans available to find the one that suits your needs best. Consider fixed-rate loans for stability or variable-rate loans for flexibility.
Additionally, government-backed schemes such as the First Home Loan Deposit Scheme or the HomeBuilder Grant might be available to support your homeownership journey. Empower yourself to make informed decisions about which loan option aligns with your financial goals.
- Seek Expert Advice:
Navigating the complex world of home loans can be overwhelming, especially for first-time buyers. That’s where home loan specialists, mortgage brokers, and specialised financial advisers can help you gain a deeper understanding of your borrowing power, explore loan options, and make confident decisions along the way.
Home Ownership starts with Borrowing Power
Understanding your borrowing power takes you from “interested in buying a home” to “serious about home ownership”. By evaluating your financial situation, understanding your credit score, familiarising yourself with the LVR concept, researching loan options, and seeking expert advice, you can embark on your home loan journey with confidence and enthusiasm.
We are committed to helping you achieve your dreams of owning a home by empowering you with the knowledge and support needed every step of the way. Let’s make your dream home a reality!