A home loan is the largest debt many Australians will take on. That’s why it’s crucial to ask yourself the right questions before diving into the real estate market.
In this article, we’ll walk you through the main factors to consider before taking out a loan, finding a property that meets your needs, and accurately determining how much you can borrow.
Factors to consider before you begin your borrowing journey
Before you start the process of buying a property, it’s crucial to think about a few factors, including:
- The type of property you’re looking to buy
- Whether the property will be your principal place of residence (PPR) or an investment
- Your current savings, income, and debts
- Whether this will be your first property or one of several
- Your current budget
You can use an online calculator to get a general idea of how much money you could borrow. You’ll find several different calculators by searching online, and each will offer an estimate of how much you can borrow—but keep in mind these estimates aren’t always accurate.
The best way to determine exactly how much you can borrow is to work with a broker, which is why it’s important to ask yourself the above questions. You can share your answers with your broker to help them determine your true borrowing capacity.
We’ll go into more detail about brokership later in this article—but first, let’s talk about how you can find a property that meets your needs without exceeding your budget.
Searching for a property that meets your needs
Most banks will offer a maximum amount they’re willing to loan you—but is maxing out the best option for you?
If you’re concerned about making repayments—especially in the case of rising interest rates—it may be best to take out a loan well below your maximum borrowing limit.
The first step in determining how much you should borrow involves searching for a property that meets your needs. Work out a list of ‘wants’ and ‘must-haves’. For example, a property with at least three bedrooms could be a ‘must-have’, while an in-ground pool could be a ‘want’.
It may be necessary to compromise on a few ‘wants’ to ensure you can meet the minimum repayments on your loan. A broker can help you work out this balance and find a property that meets your needs without putting you under financial strain.
Determining how much you can borrow
Your lender will consider several factors when determining how much you can borrow, including your:
- Gross income
- Existing commitments and liabilities, i.e. other mortgages and loans
- Living expenses
Your broker can help you work through these numbers and determine the best course of action, including which banks offer the best loan package for your circumstances.
Keep in mind that if you’re looking into a variable rate loan, many lenders will consider whether you could continue making repayments after the interest rate rises by up to 3.0%. If you’re after a fixed-rate loan, they may assess your capacity without this buffer.
Finding out how much you can borrow is simple when working with a professional mortgage broker. By asking the right questions, you can start your borrowing journey with a smart head start!