If you are thinking of applying for a mortgage loan, it is best that you are well aware of your borrowing capacity in order to determine how much is a safe amount to borrow and not go over your limits and find yourself in a really difficult financial situation. There are many tools you can find online that will help you determine how much you can actually afford to borrow without putting yourself in a risky situation. It is important to know that such tools can only guide you but can’t go into specifics regarding your situation or what the lending company you are about to work with is going to offer you. In the process of your application, when assessing your borrowing limit, the lender you have chosen may take a number of factors into account. Some of which include your current liabilities (that include store cards or credit card limits), monthly income, your number of dependants, whether you have a partner or you’re single plus any ongoing rental obligations you may have.
The evaluation process will be different with every loan lending company. For instance, one lending company can include the extra cash you make, doing overtime, while another may allow a higher lending sum for a single person with no dependants. Another thing to consider is whether you are requesting a long-term loan, short-term loan or a consolidation loan.
Doing your sums
Even though a lending company will normally use a certain set of criteria to determine a safe limit of borrowing for your mortgage loan, it is recommended that you cross-check this number with your own budget to be absolutely sure you are staying in a financially safe zone.
You must never make your decision based on what someone else says you can afford. Some lending companies may offer you a loan amount higher than what you can actually afford based on your monthly income. It is of great importance that before you take out a loan you make a detailed budget calculation to ensure you will have no trouble with the repayments over the whole period of that loan. When calculating your budget, you also may want to include some financial buffer for unplanned circumstances and lifestyle changes.
Calculating your budget
When you prepare your budget, you may want to hire a financial planner to assist you along the way but that can be quite costly. When you look at all of your expenses and your income, you should be able to accurately calculate your budget. Still, if you don’t feel confident enough to do this on your own, a good financial assistant could go through the calculations with you to ensure everything is as it should be. To imagine what repaying a mortgage loan would be like, calculate the monthly rent sum you are currently paying plus some of your savings and you will have roughly the same amount you would be paying for a comfortable mortgage loan. Of course, this is a guide, not taking into account other expenses like interest rates.
Don’t forget to double check the numbers you came up with after calculating your budget, just to be safe. It is also important you don’t forget that these figures show your current budget capacity. If you are confident that you will be able to save more money for repayments and that the budget calculation you’ve done is not accurate in that sense, you can always make changes. If you find yourself within the category of applicants who feel they can afford a higher loan repayment, you better consult mortgage advisor and explore all your options.
If paying a higher purchase price is not a problem for you, there are certain strategies that you may want to use so that you can structure your mortgage in a way that gets you the loan amount you require. For instance, there are lending companies that will give you a servicing guarantee or let you take out higher amounts if you go for a certain type of loan or repayment.
Expenses and costs
When evaluating your budget capacity, one of the most important things is to be able to manage the month-to-month expenses in the long run.
When calculating your budget, in order not to find yourself in a bad situation somewhere along the way, try to think of your future expenses and what they’ll be once you purchase a property. As the owner of your new home, it would be for the best not to lose track of these costs:
- utility bills
- council rates
- body corporate fees
- insurance expenses
- maintenance expenses
- management expenses (in case you buy an investment property)
You should also think about any changes you may faced within the next few years and how they can affect your financial stability and your ability to take care of your repayments. Here are some possibilities to consider:
- What if you get a promotion and your monthly income increases ?
- What if you decide to have children and lose some additional income due to simply not having enough time?
Thinking about and planning for the future is essential when taking out a big loan. Things happen, circumstances change and there are a lot of things that are simply out of your control. However, that does not mean you should not take the time to think through all those things that are absolutely dependent on your day-to-day choices. You don’t want to unreasonably limit yourself by borrowing less than you can actually afford or do the complete opposite and put yourself in a situation where you struggle to make your repayments each month.
Be in control
There is no better person to make the right decisions for you than yourself. No matter what type of loan you decide to take out, if you decide to fully rely on your budget calculations or not, you should always be in control of your finances and the way you manage them.