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The time has come for you to start getting serious about buying a home.  You have been depriving yourself of avocado toast for the past two years to scrape together a decent deposit but you are not really sure how much you can borrow. Let me run you through it.

 

What is borrowing capacity?  

In a nutshell, this is how much the banks would be willing to lend you for a mortgage on a home, based on your ability to repay them. 

Your capacity to borrow for a mortgage is calculated by calculating your surplus income available for the repayments.  Simply put, this is;

Why do the banks use a rate of 5.50% or the actual rate + 2.5% to calculate borrowing capacity? 

Interest rates are currently at record lows.  If interest rates were to increase, the banks want to make sure that you can repay them at an increased rate. 

Your borrowing capacity is really made up of two elements – 1) Servicing – how much money will you have to pay the loan and 2) Contribution – how much deposit do you have saved.  We will cover deposits in the next blog coming soon.

Your borrowing capacity is derived from the above formula.  But it is important to keep in mind that just because your borrowing capacity might be xxx, this doesn’t mean you should begin looking at houses for that amount! It is important to be able to service your loan, plus have funds set aside for maintenance, lifestyle and anything else that comes up. 

Generally speaking, most people don’t know how much deposit they might need, nor how much they can borrow when they contemplate entering the market.  This is why it always pays to speak to a qualified mortgage broker who can help answer these questions and more!

Reach out to us for more information.