A home loan is a great way to finally live out your dream of owning your own home. Buying your first property is an exciting time but try not to make the same mistake most loan applicants make; neglecting to find out how much they can actually borrow.
Knowing your borrowing power is key to avoiding overspending
Think about your future
Your first home is a great investment, no doubt about it. But a house alone is not your entire future. There are plenty of other things you need to consider long-term for your family. So, a good start when determining your borrowing capacity is to calculate how much money you’ll need to live comfortably in the future.
This budget includes food and other daily living expenses. Also, make sure that you include enough for leisure and recreation. Once you’ve determined an ideal budget, compare it against your household’s income. This will help figure out how much you will have left to meet monthly loan repayments.
Lenders and financial experts suggest that no more than 28% of your household income should be allocated to repayments of a home loan.
Evaluate your plans
Be realistic and take into consideration your plans, whether it be to have children or finish your master’s degree. Such plans will eat up a good portion of your budget and, if left unaccounted for, you’ll risk defaulting on your home loan. Alternatively, you’ll be scrapping your plans altogether or sacrificing most of your daily comforts.
So, when determining your borrowing capacity, decide which of your plans to pursue and then set aside part of your budget for those plans
Check your emergency fund
Unfortunately, emergencies happen and they can be costly. Check your emergency fund before applying for a home loan. Knowing how much money you have set aside for emergencies will also help you set aside a realistic budget for future repayments.
Your savings will also determine how big of a deposit you can put down for the property. The bigger deposit, the lower monthly home loan repayments you’ll have.
Use the home loan repayment calculator
Another way to determine your borrowing power is to use a home loan repayment calculator. Most lenders offer this tool for free. With a home loan repayment calculator, you can find out the monthly repayments required for any amount of home loans, including the interest rate.
With this information, you can find out if your monthly income can afford the repayments, and still live comfortably. For example, if you would like to borrow $350,000 over a loan term of 30 years with an interest rate of 5% per annum, then your monthly repayments would be $1,879.
If you have an annual income of $75,000, then your monthly salary should be $6,250. Multiply this by 28% and you’ll get $1,750. This is the part of your monthly salary that you can allocate for home loan repayments.
Comparing the monthly repayment ($1,879) to the amount you can afford to pay ($1,750), shows you don’t have the borrowing power of a $350,000 home loan. It’s best then to either save for a bigger deposit or find a cheaper property.
Get a Home Loan Pre-Approval with The Waters Ooralea
When buying your first home, determining your borrowing power will ensure that you’ll buy a property within your means and will still be able to live a comfortable life throughout the entire home loan term. It’s also best to get pre-approved so you’ll know exactly how much you can borrow before shopping for a property.
The Waters Ooralea can give you a home loan pre-approval with our in-house finance service. Our professional finance broker will conduct a FREE financial health check to make sure that your home loan is aligned with your borrowing power. We can also help you find the best loan option that will suit your financial situation.