Nerves and excitement go hand-in-hand when it comes to buying your first home. Buying a home is arguably the single largest financial decision you will ever make, so you are bound to have many questions. Two of the biggest questions that when looking to buy your first home are; “how much can I borrow?” and “how much will my repayments be?”. These are critical questions to have answered so that you know what budget you have when shopping for your first home.
Before you apply for your mortgage you should consider more than just your borrowing capacity. Mortgage providers will look at income and expenses to help determine your ability to make repayments not just in the current market climate, but also if interest rates or your personal circumstances change.
How Much Can I Borrow?
Talking to a bank or mortgage broker when buying your first home can be daunting. It helps to know what they look at. For the most part, mortgage brokers still assess the loan-to-income ratio, many take into account your employment situation (eg. self employed or PAYG), in addition to family circumstances such as number of dependents. As a very rough guide, lenders rarely go above a loan-to-income ratio of four-and-a-half times annual income. So if you had an annual income of $50,000, you’d be able to borrow up to around $225,000.
Lenders also assess what monthly repayments a first time home buyer can afford. They consider a range of things, including personal and living expenses. It’s called the “affordability assessment”. All lenders also take into account a “stress test” to understand your ability to repay a mortgage should your circumstances change, such as if you become redundant or have a baby.
Your debt-to-income ratio is another very important thing for both you and your lender to consider. In some ways the lending industry actually works against you. Lenders are willing to offer you more than you may be able to afford. Lenders will offer you the maximum they believe you can afford, but they are often far too generous. This is why I like to understand what my clients maximum repayments are, not necessarily their maximum borrowing capacity.
Mortgage brokers can play a massive part in the journey towards buying your first home. Not only can they provide you with valuable information not just about how much you can borrow, but also about which providers may be best suited to your personal situation.
Being a first home buyer means that you have to deal with a lot of big numbers. It can seem like a bit of a stretch on your budget. It’s important that when you buy your first home you only buy a home that meets your needs but without putting undue pressure on your budget and financial situation. If you are tempted to leverage your assets as much as possible and put all of your money into your home, you’ll end up sacrificing a great deal such as travel, personal luxuries and a healthy cash flow. Remember, there’s always a difference between what you can borrow and what you can afford. Here are some tips on helping you understand how much you can afford when buying your first home;
Run Affordability Scenarios
You can run some affordability scenarios using an online affordability calculator. These give you a good view of what kind of a budget you really have when buying a home. Calculate some what-if scenarios to see how they affect your ability to pay off a mortgage.
Talk to Multiple Lenders
When buying your first home it is important to do your research – not just about the property that is likely to suit you needs, but also about the lender that is going to be most suitable. It’s worth your time to compare different rates and loans from different lenders. This is exactly why mortgage brokers are a fantastic, time saving, conduit to achieving this. You’re likely to find a better interest rate and more suitable product by discussing your options with a broker. It could also open your eyes to see the different loan amounts different lenders believe you to be qualified for.
Consider All the Expenses
There’s more to buying a house than just buying a house. You’ll be spending money on taxes, insurance, stamp duty, bills and all the other “joys” of home ownership. You’ll also be the one footing the bill for maintenance and upkeep and buying new furniture if needed. Having a clear understanding of how much you’ll really be paying helps to determine how much you can borrow in the first place. Many first home buyers are attracted to the well-known “fixer-upper”, but this can often come with a hefty price tag – be sure to take this all into consideration.
How Much Will my Repayments Be?
Every first-time home buyer should also consider how much their repayments will be. When you add the interest to the principal amount (how much you borrow) it comes to a lot more than you might expect. Just because you borrow $200,000 doesn’t mean that’s how much you pay back.
The best way to calculate how much your repayments will be is to use a mortgage calculator. There are lots of great calculators online. Yet if in doubt, just pick up the phone to your mortgage broker, they’ll talk you through it if you aren’t sure how to use one.
Thankfully, these mortgage calculators are relatively straight forward – but it does depend on which one you use. Regardless on how complex the calculator is that you choose to use, more than likely the information you will need to enter is information you will require for your official loan application when it comes time to do so. Take the time to prepare your information carefully with your broker so that you can obtain a clear and accurate understanding of your financial situation.
The very best mortgage calculators can do much more than just add up some numbers for you though. They take the other costs of home ownership into account. If all you had to do was put in your principal amount and interest rate, then you could do it with any old calculator. It’s important to remember that whilst a mortgage repayment calculator is great, it is also an automated solution – it does not know you personally and therefore cannot tailor the information to suit your needs. A mortgage broker will take many things into consideration, including discussing the options regarding your lenders mortgage insurance (LMI). It may be that if you waited a few more months to build up your deposit, you could avoid or reduce the hefty fee associated with LMI.
When you buy your first home, it’s critical that you don’t forget to include the extra costs in your calculations so that you can avoid some nasty surprises.
There are several factors that go into determining how much you can borrow and how much the loan repayments will cost. Just keep in mind that there is a big difference between what you can borrow and what you can afford to borrow. Never borrow more than you can afford to pay back. For personalised home loan advice, contact us at GA Finance and we will help you through this exciting – and nervous – journey!