The first step in the journey to financial freedom is to approach your Redwood Home Loans Mortgage Broker to determine your borrowing power. This is important to know how much you can afford to spend on a property and repay on your home/ investment loan. By having an idea of what you can borrow, you can adjust your property search so that you only look at dwellings that are in your price range.
The amount you can borrow will depend on a number of factors:
- Your annual income
- Your monthly expenses
- The type of loan and current interest rate
- Repayment type (principal or principal and interest)
- The loan term (number of years to pay the loan back)
- Estimated repayments.
Redwood Home Loan mortgage brokers can provide you with an accurate estimate of your borrowing power.
Your income & commitments:
Before a lender will give you a home loan, they will want to assess how much you can afford in mortgage repayments – after all a lender will want to ensure you can repay your loan over the loan term and salary is an important element to repay the loan.
To determine exactly how much you can repay, the lender will assess your income as well as any outstanding debts and other commitments you have. The lender will also review your current commitments, such as your outstanding debt, credit and store cards, personal loans, car finance and any other ongoing financial commitments you may have to determine your overall liability position. Living expenses such as school fees, child care fees etc. all have to be taken into account.
Your credit history will play a big role in determining what your borrowing capacity is. A credit impairment may limit your ability to borrow. A clean credit history provides comfort for the lender that you can pay your financial obligations on time, you may be able to borrow a higher amount. Even if you have missed a few phone bills may work against you when you are trying to obtain finance.
Before you invest and consider your borrowing power, it will be advantageous to have cash savings to cover a deposit on a propped property. The more money you have in savings and can thus contribute to your property deposit, the easier it will be to obtain finance and increase your borrowing capacity.
Home loan type, term and interest rate:
The amount you can borrow may also depend on the interest rate and the term of your home loan. The lower the interest rate, the lower your repayments will be. A longer-term home loan will mean lower repayments. Its not just about the cheapest rate, Redwood Home Loan Mortgage Brokers will also assess product features such as offset/ redraw to ensure the loan is right for you.
Your lender will want to know what you have in the way of assets before they determine how much you can borrow. Having assets like a vehicle, an investment property or shares can significantly influence a lender’s decision and improve you Loan to Value Ratio (“LVR”).
What is LVR?
Loan to Value ratio is the rue financial value of your property, and decides whether your Home Loan needs to be covered by Lenders Mortgage Insurance (“LMI”) or Low Deposit Premium (“LDP”).
The Loan to Valuation Ratio is simply the loan amount divided by the value of your property. Lenders require LMI or LDP if you borrow more than 80% of the property.
Value of the property:
The LVR will depend on the purchase price of the property. The lender will conduct a valuation of the property to determine the loan amount.
Disclaimer – The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. The author and Redwood Advisory disclaim responsibility for reliance on the information detailed in this article.