Australian Mortgage Affordability
Introduction to Mortgage Affordability
We have people contacting us all the time wondering how much they can afford when it comes to a home loan. The good news is that the brokers we work with are experts when it comes to finding the right mortgage for you.
In this article, we’ll look at-
- How much you can afford when it comes to a home loan
- Affordability for first time buyers
- How much deposit you’ll need
- How to qualify for a low deposit loan
- What Loan to Value (LTV) is acceptable
- How bad credit might affect your chances
- Why you should talk to a specialist broker
How much can I afford to borrow?
All lenders are different, but generally, they will factor that about 30% of your income can be used to service your home loan.
They will also look at your debts, assets, spending habits and how much deposit you have to calculate the size of the mortgage.
If you take 30% of your annual gross income, and use this to estimate a loan amount by using an average rate of 4.5% with a 5% deposit. You can then use this to estimate a potential purchase price.
If you don’t have any debts or liabilities, and we use an interest rate of 4.5% over 30 years, here are three scenarios based on income levels from $50,000 to $100,000:
|$50,000 annual gross income – 30% = $1,250 per month at 4.5% p.a., which equates to a mortgage of $246,000.
With 5% deposit.
Maximum affordable property price would be $260,000.
|$75,000 annual gross income – 30% = $1,875 per month at 4.5% p.a., which equates to a loan amount of $370,000.
With 5% deposit.
Maximum affordable property price would be $390,000.
|$100,000 annual gross income – 30% = $2,500 per month at 4.5% p.a., which equates to a loan amount of $493,000.
With 5% deposit
Maximum affordable property price would be $520,000.
The above is indicative only and you should consult your lender or broker for the most up to date figures
How do I work out how much can I afford if I’m a first time home buyer?
If you’re a first time home buyer, you can get an idea of the size of mortgage you can afford by doing some simple calculations.
- Take how much you currently spend on rent.
- Calculate what your monthly mortgage repayments would be with a loan amount you feel comfortable with.
- What’s the difference? Can your income handle the increased costs?
Make sure you include other ongoing costs, such as car, home and contents insurance. Body corporate fees if you’re looking at an apartment, or rates if you’re looking at a house
How much deposit do I need?
Provided you have a strong employment and savings history, with evidence of genuine savings (gifts from relatives don’t really count), some of the main banks could potentially offer home loans of up to 95%, although this can depend on the loan amount.
Other non-bank lenders are also offering up to 95% of the property value, and some may also include an extra 2% to help cover lenders mortgage insurance (LMI). This means you could get a 95% home loan and then add the cost of the LMI to the total loan amount.
This means that to buy a home of $400,000, you could be approved for a 95% loan of $380,000, as long as you provide a cash deposit of $20,000. However, you can add the cost of LMI of to the loan amount (up to $8,000), which brings the total loan up to $388,000 or 97%.
Finding those deals can be tricky, and at worst, could leave footprints all over your credit rating. The good news is that the expert brokers we work with know who they are and can help you find the best deal for your circumstances if you make an enquiry.
What can I do to qualify for a low deposit home loan?
After the credit crunch, lenders have been forced to be more circumspect in regard to who they will and will not lend to. To ensure you pay a low deposit you will need to ensure that –
- You have a good income: Lenders can be very conservative when assessing your ability to repay a 95% loan, so your ability to repay the loan is paramount.
- You have genuine savings: Most lenders will need proof that you have personally saved 5% of the purchase price. (Gifts from relatives are not considered part of your savings history)
- You have a clean credit history: Essentially what they are looking for is someone who has a credit file with no bad marks at all and that you have paid all of your bills such as rent (or mortgage repayments), credit cards, personal loans and other debts on time for at least the last six months.
What Loan to Value (LTV) is acceptable?
Not so long ago most anyone could get a 100% home loan (i.e. a mortgage with no deposit requirements) and some as high as 105%, but things have tightened up since the credit crunch. Most lenders will only go as high as 95% LTV, and that only if you have a good income and credit rating.
It is, however, possible to get a 100% home loan if you have someone who is a homeowner (or other suitable asset) who will act as a guarantor for you.
Can I still get a home loan with bad credit?
Yes. With the right advice from one of the brokers we work with who are experts at finding the right mortgage for people with bad credit.
You may have to find a higher deposit (usually 20%), but it all depends on a number of factors such as –
- The age of credit history issue (the older the better).
- What the outcome of the issue was (whether it was finally settled or not).
- The type of the credit issue or judgments (such as a telco, utility or financial institution default). Generally, telco and utility-related defaults are less severe than financial default listings.
- Your more recent credit history.
- Your current employment situation.
Check out our guide to bad credit mortgages in Australia here, or better yet, you can arrange a no-obligation consultation here with one of the advisors we work with. They are experts when it comes to helping people with bad credit find a mortgage.
Why should I talk to a whole-of-market broker?
Not all brokers are the same. Some have access to just a few lenders, whist others, like the brokers we work with have access to the whole market, and so they can find the best deals for your circumstances, even if you’ve had bad credit in the past.
The brokers we work with have passed a 12 module training programme and are experts in their particular area.
We don’t charge a fee and there’s no obligation, just the right advice every time.
Contact us here today, and then just sit back and let us do all the hard work.