What factors determine how much you can borrow?
Often we receive emails here at Savings Guide asking ‘what are the factors that determine my approval on a home loan or credit line’ as there is little information in the market place on this topic.
While there is no way to be 100% certain of what each lender requires, there are a few key points that are used by most institutions when assessing your ability to repay a loan and thus whether or not they will grant you the home loan.
The confusion in the market place about what factors actually matter to the lender when applying for a mortgage is largely due to the fact that each lender is different and they change their criteria depending upon how valuable mortgages are to them at that given point in time. When the GFC hit Australia, most lenders tightened their strings to the point of making it nearly impossible to receive a loan – this was used as a safety tool by many big banks.
After talking with St.George about home loans only recently, they mentioned the following points:
- Your income and financial commitments
- The cost of your lifestyle and living expenses
- Your prospective property purchase & its value
- The loan you are looking at, the term of this loan and the type of loan
- Assets you can offer as security against the loan
- Your credit history
Your income and financial commitments
Lenders look at your income stream, your ability to repay the loan and the security by which you are employed. Self employed people will have a harder time showing they are secure, while people who have held a job for a solid amount of time will be looked upon more favorably.
Your financial commitments are also taken into account, in the sense that the lender wants to know whether you have any existing debts, car loans, lines of credit or perhaps even credit cards that are debt free but still open.
More on how your credit limit affects your borrowing power.
The cost of your lifestyle and living expenses
It is also wise to look at your lifestyle, the amount of money you require to live it and what expenses you incur on a regular basis. The lenders are looking to understand whether or not you can truly afford the repayments while still maintaining a lifestyle that is suitable for you.
Many people apply for loans and plan to sacrifice a large amount of their money, at the expense of their lifestyle – which is one of the main reasons people end up defaulting on their home loans.
Your prospective property purchase & its value
Just because you buy a house at $X doesn’t mean the lender believes it is worth $X. The lender will actually value the property themselves to ensure it is a sound purchase and not over valued or undervalued. This is basically a way for the lender to understand whether or not your purchase makes sense and will provide a return to them should the worst case scenario occur and they need to repossess your house.
The loan you are looking at, the term of this loan and the type of loan
The borrowing power may also be affected by the type of loan you are looking at and its corresponding interest rate. The lower the interest rate, the lower your repayments, the more likely you are to meet the minimum required.
Assets you can offer as security against the loan
The lenders will also look at what existing assets you have available. This could be a car, your share portfolio, an existing property or some other tangible asset that can be used by the lender should you not meet the loan repayments.
Your credit history
Your credit history is a very important part of the home loan application process. The lender will check to see that you have no red flags against your name for defaulting on previous loans, credit cards or other lines of credit.
Click here to check your credit history for free. It is suggest that if you find any red flags against your name, do whatever you can to ensure they are removed before applying for the loan. It could be as simple as a late video fine that was sent to debt collectors when you moved address.
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