Q. We are looking to upgrade from a home unit to a family home.  How do banks determine our capacity to borrow and how much should we borrow without overextending ourselves?

//Q. We are looking to upgrade from a home unit to a family home.  How do banks determine our capacity to borrow and how much should we borrow without overextending ourselves?

Q. We are looking to upgrade from a home unit to a family home.  How do banks determine our capacity to borrow and how much should we borrow without overextending ourselves?

A.  Broadly speaking, your lending eligibility is determined by your current income, your living expenses, your existing debts and the amount of equity you will have in the property securing the loan.

Lenders will consider if anything will affect your future family income and hence your ability to make future loan repayments for example; change of employment, pregnancy or extended leave.

Each lender will have a varying criteria and policies in terms of determining how much they will lend you.

Some but not all lenders will allow regular bonuses or commissions to be included to determine your capacity to borrow.

Lenders will assess your capacity to service a loan with a buffer of around 2% in case of interest rate rises as opposed to the advertised rate.

What lenders count as living expenses will vary.  Lenders have their own measure of what they include and what they feel is reasonable.  Typically the figure is based on Australian Bureau of Statistics data, determined by the number of dependents in the family and where you live.

Depending on your occupation, you may be able to borrow a higher amount against the value of the home without paying Lenders Mortgage Insurance (LMI).  For example if you are a Doctor, some institutions allow you to borrow up to 90% without LMI.

Limits on how much you can borrow may vary depending on a banks existing exposure to a region or to a specific development.

How much you should borrow should be determined by you and not the bank.  Have a very clear understanding of what your income needs are for living expenses.  If interest rates were to rise how would that impact you? Build in a buffer  for future changes.  Will your family income change in the future?   Is your employment secure?

The cheapest advertised rate may not be the most appropriate for you.  A good broker or debt advisor will be able to structure a loan based on your needs both now and into the future; balancing your lending needs in an appropriate structure and at the right cost.

 

Q. I have a residential investment loan that I am currently paying interest only on.  I have been advised by the bank that the loan will change to principle and interest.  What options do I have?

A.  In March 2017, the Australian Prudential Regulation Authority (APRA) notified all banks to tighten their lending practices, particularly on interest-only and residential investor property loans.

According to the Reserve Bank of Australia estimates,  40% of all new residential property loans were  interest-only, with 64% of these being for investment properties.  APRA set a regulatory goal to reduce the overall share of new interest-only loans by banks to 25% of their residential lending book by the end of 2017.

Whilst you may like to extend your current interest only loan, this option may not be available to you. In an effort to reduce their exposure to interest only loans, a number of lenders have withdrawn from the residential interest only market, especially in the residential investment loan space. With fewer institutions offering interest-only facilities, interest-only loans have become more expensive and more difficult for borrowers to secure.

As you are currently servicing an on interest-only loan, you need to be considering your options now.  These options include; refinancing your interest only loan with another institution, changing to a principal and interest loan or look to sell assets, or to clear or reduce your debts.

If you can afford to revert your loan to principle and interest, lending institutions may offer preferential rates for principle and interest loans, especially for owner occupiers.  Shop around on the basis of loan features and loan costs but please be mindful of the rapidly changing availability of loan finance and potential future headwinds.

Of course, each option needs to be considered carefully and I would recommend seeking professional advice as to which will provide you with the optimal long term financial outcome.

By |2018-11-15T23:05:15+00:00November 3rd, 2018|Uncategorized|Comments Off on Q. We are looking to upgrade from a home unit to a family home.  How do banks determine our capacity to borrow and how much should we borrow without overextending ourselves?

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