When you apply for a home loan, lenders assess your serviceability based on your current income and debts. They will also take into account things like your job security and history, as well as any other factors that might make you a higher-risk borrower.
So, how much can you afford to borrow?
There are two factors lenders look at when calculating the maximum purchasing price for buying a home. Borrowers are assessed on:
- Their income and expenses to see how much they can afford (serviceability)
- Their deposit and how that translates into a purchase price.
How To Determine The Maximum Purchase Price From Your Deposit
When buying a house, you need to consider your deposit, stamp duty, and other purchasing costs.
Lenders usually estimate 5% of the purchase price to cover your purchase expenses. This is excluding the standard 20% deposit or a minimum 5% deposit you are required to put in towards the purchase.
10% of the purchase price, which comprises a 5% deposit and 5% purchase expenses, is the minimum amount you will need to get a loan approved. Whatever amount that 10% equals multiply it by 10, and that is the purchase price of a home you can be expected to afford based on that deposit.
Example: If you have savings worth $30,000, half of that would be your deposit and the other half would cover the purchase expenses. To find out your maximum purchase price, we can multiply $30,000 by 10. The result is $300,000, which means that the maximum purchasing price, as determined by our deposit, is $300,000.
What if we wanted to put in a standard deposit of 20%? Assuming we still have $30,000 in savings, that would be 25% of the purchase price (20% for the deposit and 5% for purchase expenses). So, to find our maximum purchase price for buying a home, we would then divide $30,000 by 4 (100/25 = 4). This shows that the maximum purchase price would be $120,000.
How To Determine The Maximum Purchase Price From Your Serviceability
When calculating your serviceability, lenders factor in your income and expenses, including the amount you wish to borrow. If you don’t pass this test for borrowing the amount you want, then you need to start looking at ways to reduce your loan amount or increase your income.
You can use our borrowing power calculator to get an estimate of the maximum loan amount you would be eligible to borrow from most lenders. Once you find out the maximum amount you can borrow, you can use the following formula to calculate the maximum purchase price you can aim for – assuming you are going to put in the standard 20% deposit:
Maximum Property Price = Maximum Loan Amount x 1.25
Example: The serviceability calculator shows that the maximum loan amount you can borrow is $700,000. Then, using the above formula, you can find out the maximum property price, which is $875,000:
$700,000 x 1.25 = $875,000
Compare The Results
Once the serviceability has been calculated from your income and expenses, we can then compare it to the maximum purchase price determined by the deposit.
The maximum purchase price for a home is the lesser of the maximum determined by the deposit and that determined by serviceability.
Even if someone has a high borrowing capacity, if the loan they want requires a deposit higher than they can pay, they won’t be able to qualify for the loan.
Once you have determined your maximum purchase price, you will have a good idea of what is restricting you.
Use Grants To Boost Your Savings
If you are eligible for a grant or concession, such as a waiver for stamp duty, then you may not have to cover the 5% for purchasing costs.
Grants can significantly increase the maximum price you can pay for a home.
We can apply for a grant on a customer’s behalf and have it available upon settlement of the home loan. This can be used towards the purchase of the property as well.
To find out what grants could be available to you, call one of our expert mortgage brokers on 1300 889 743, or make a free enquiry online.
Borrowing Power Limits Are Stricter For Investors
Over the past couple of years, the Australian Prudential Regulation Authority (APRA) has required lenders to tighten their lending to investors.
In the past, investors’ serviceability was often assessed at the actual repayments you would pay every fortnight or month.
For example, for a $100,000 interest loan at 4% a year, your actual repayments are $4,000 a year or $333 a month.
Now, for the same loan, banks will assess your borrowing power based on principle and interest at 7.25%, or higher in some cases.
So on that same loan amount, you would need to show a sufficient income to debt ratio to afford $8,186 a year or $682 a month.
Continue Growing Your Portfolio
Mortgaging multiple properties with a major bank or lender at a high serviceability rate and then mortgaging additional properties using a non-bank lender is a common strategy. This is because, each addition to your portfolio will decrease your serviceability for the next mortgage and so, you may no longer be eligible to get a loan from banks at some point. In that case, to continue growing your portfolio, you need to start taking home loans from non-bank lenders.
Some non-bank lenders aren’t regulated by APRA, which means they don’t need to adhere to serviceability rules. Despite the fact that you’ll be charged a slightly higher interest rate with a non-bank, it’s a strategy that may help you build your investment portfolio.
Want to know more?
Speak with one of our mortgage brokers by calling 1300 889 743 or by completing our free online assessment form.
We Can Help Increase Your Maximum Purchase Price
If your serviceability is a bit tight, we suggest that you check out our article, Improve my borrowing power and capacity.
Alternatively, if it is your deposit that is holding you back, we suggest you read our article Saving for a home deposit: How to budget.
In the end, the lenders make the final decision on maximum purchase price. It is best not to commit to purchasing a property until you have pre-approval.
To find out the best plan for you and to get pre-approval, talk to one of our highly experienced mortgage brokers. You can enquire online for free, or call us on 1300 889 743.