What can I afford to buy?

Before you start on the adventure of looking for your dream home, there are two key questions that need to be answered – what can you afford to borrow, and what can you afford to repay?

Working out your borrowing power helps you to narrow down your property search and lets you picture what the financial commitments of a mortgage will be.

How much can I borrow?

If you’re in the market for a new home, chances are one of your key questions is ‘How much can I borrow?’

There’s no single answer because this is one area where lenders – and the different approaches they take – vary widely. Watch this quick video for more.

Calculate my borrowing capacity

Let's say your borrowing capacity calculation came back at $350,000.

On a principal and interest loan at a 6% interest rate for 30 years, the repayments will come in at $2,098.43 each month.

If your budget reveals that you're only saving $2,000 per month after all the regular bills and expenses are paid, you should look at where you can make savings, or reduce the amount you're looking to borrow.

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How much deposit do I need to buy a home?

To understand what you can afford to buy, it is important to know what your deposit will be. When you're saving for your home loan deposit, it's great to aim for at least 5%. Make sure to factor in more than just the price of your dream home.

Saving your deposit

Whether you’ve got no money put aside for your deposit, or you’ve been saving for years, we can help you evaluate your options. Some lenders will even allow you to buy a property with no or very little genuine savings, when a family member acts as a security guarantor.

We can help get you on the right track and into the property market sooner. Watch this quick video to find out how.

Factors to help determine what you can afford to repay

Working out your LVR

Your loan to value ratio will have the biggest impact on how much lenders are willing to lend to you. To work out how much you should be aiming to save, try working backwards and aim to save at least 5% of the property value. Use our loan to value ratio calculator to work out your ideal home loan deposit.

What can you afford to service (pay back)?

Working out what you can afford to repay on a weekly, fortnightly or monthly basis will also dictate the size of the loan you should get and therefore the necessary home loan deposit.

Along with considering repayments, additional costs to consider can include the initial set up and moving costs through to council rates, strata fees, and utility bills. All of these need to factor into your budgeting when figuring out what you can afford to buy.

Interest only loans or principal and interest loans?

When looking to borrow it’s important to compare all the different home loan types available.

If you’re looking to purchase an investment property, it’s worth looking into the option of an interest only loan. With an interest only loan, you repay only the interest that is calculated on the principal (the initial loan value). As a consequence, the repayments are lower than with a standard home loan (where you pay off both principal and interest).

A mortgage broker will help work you through the pros and cons of each home loan type and help you find the one that’s most suitable to your needs.

Factoring in LMI

If you aren’t able to save a 20% home loan deposit and don’t have the option of a security guarantor, lenders will require you to pay for Lenders Mortgage Insurance (LMI). LMI covers only the lender against any losses that may result from you defaulting on your home loan.

LMI is generally calculated as a percentage of the home loan value. Depending on the lender you select, you may have the option to either pay the LMI premium at settlement of the loan, or to add the LMI premium amount to the total you will need to borrow.

Factoring in other home buying costs

When working out how much you can afford, it's important to factoring in all the associated costs.

These associated costs can include:

A good formula to use when working out what you will need to borrow is:

Total funds required (house price + costs) - your contribution (deposit + grants) = the amount of money you will need to borrow.

Consider the unexpected

Factor in potential events such as interest rate rises, work changes or even accidents, and plan for a financial buffer. Ideally you should always have some spare cash to stash away after paying all the bills (including the mortgage).

As a guide, your mortgage repayments should not exceed 30% of your gross (pre-tax) income.

Property Ownership

This guide outlines the essential steps to achieving property ownership, starting from the first appointment with a mortgage broker all the way to settlement.

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