What Is One’s True Borrowing Power For A Home Or Investment Loan?
The borrowing capacity or borrowing power for an individual or individuals can vary widely depending on whether you are borrowing for an owner occupied home or an investment property.
The borrowing capacity will also vary if you’re looking to refinance your loan as opposed to a property purchase. There can also be additional variations based on the profile of the borrower/s and which lender you approach.
How Much can I Borrow?.
- Your income, the amount and type of debt you already have, are you borrowing for owner occupied purposes or for investment purposes?
- Are you a full documentation borrower or a low doc borrower?
- Are you borrowing to purchase a property or refinance an existing loan?
- Are you looking for a cash out loan?
- Are you a First Home Buyer, will there be Lenders Mortgage Insurance required?
- Do you need a bridging loan?
- Even which bank or lender will you decide to go with?
- All of the above can and will have an impact on your borrowing power.
Also, from lender to lender, their policies on how they include the above items for calculating your borrowing capacity can vary and at times can do so quite widely.
- Other area’s that could limit the borrowing power of loan applicants are, casually employed applicants and how long they have been on the job or in the same industry can affect whether or not the lender will accept that income for borrowing purposes. Not all lenders have the same policies in this category so it pays to shop around.
- Self employed applicants could also find some difficulty when they legally minimise their taxes. However, when they minimise their personal taxes they’re also reducing their taxable incomes, which is what the banks use to gauge how much you can borrow. Again it will pay to shop around.
- If you are looking to maximise your borrowing power, work through an expert mortgage broker who can maximise your potential and guide you in the right direction.
- Using a how much can I borrow calculator from the internet to determine your borrowing capacity will not give you a true result as they only give an inaccurate conservative result at best
- Find your best mortgage broker who will have access to all of the individual lenders home loan borrowing calculators where they can simultaneously factor in your personalised information to provide a true result that will reflect your maximum potential. Don’t sell yourself short when it comes to borrowing capacity
Investment Property Loan Borrowing capacity
- Smart property investment strategies include using existing equity in property to borrow the full purchase price plus the purchase costs of the investment loan. This eliminates having to put any cash in to purchase the investment property
- An Interest only home loan will maximise the tax benefits of investment property
- An interest only mortgage will also reduce the monthly cash flow expense requirements for the investor
- Without equity in existing real estate, some lenders will still lend up to 90% for investment property loans inclusive of lenders mortgage insurance
- Many first home buyers start out with an investment property purchase first, because their borrowing capacity is increased when the rental income is included along with their regular incomes for servicing purposes (conditions apply)
- The refinancing home loan, maximum loan to value ratio (LVR) for nearly all lenders is 90%
- Cash out policies for most lenders, if not all, on a home loan refinance over an LVR of 80% require documentation supporting a worthwhile purpose.
- Consider using the savings you make on a home loan refinance when refinancing short term debt such as credit card balances for extra payments on your home loan refinance
- Self employed home loan applicants are required to provide lenders with the last two years personal tax returns and if they operate through a Pty Ltd company the last two years company tax returns and full financials are also required
- There are now a number of lenders who only require the latest year’s tax returns, not two years
- Low doc home loans are available for those that don’t have tax returns up to date
- All main stream lenders (except ANZ, 60% only) will lend up to an 80% LVR for low doc loans
- Lenders mortgage insurance is charged on all low doc loans over 60% LVR
- Experienced mortgage brokers can be of great value when it comes to self employed home loans and low doc home loans. They can quickly sort what lenders will do what when customising self employed home loans and low doc loans
- Keep in mind a first home buyer loan requires a minimum deposit of 5% genuine savings when doing research on low deposit home loans
- Genuine savings is classified as having been in an account in the applicants name for at least 3 months, or bank statements show that the money has been diligently saved over 3 months or more
- There are exceptions to this first home buyers loan policy with some lenders, check with your best mortgage broker
- Maximum LVR when buying your first home for owner occupied purposes is 97% for selected lenders inclusive of any Lenders Mortgage Insurance (LMI) (some will only go 95% inclusive of LMI). However, 95% inclusive of LMI for investment property loans with selected lenders
- Additional costs such as Lenders Mortgage Insurance, Purchase Stamp Duty and legal fees (conveyancing) should also be taken into consideration when calculating your borrowing capacity.
- A first time home buyer can save a lot of time and frustration by seeking out the best mortgage broker they can find
a Debt Consolidation Loan?
- It’s worthwhile remembering that debt consolidation loans turn short term debt into long term debt
- Short term debt turned into long term debt through a debt consolidation loan will incur additional interest not necessarily incurred while it was a short term debt.
- When consolidating debt into longer term debt consolidation loans consider a shorter loan term when establishing the loan or discipline yourself to use the savings or most of the savings for extra repayments into the new debt consolidation loan.
- Lenders will only lend to a maximum of 90% LVR on debt consolidation loans. Most lenders will only lend a maximum of 90% LVR inclusive of Lenders Mortgage Insurance. There are some that will go to 92%
- Finding that experienced best mortgage broker can be very helpful for calculating your borrowing power for a debt consolidation loan
- Self managed superannuation funds (SMSF) have become extremely popular in recent times. This is because of the poor performance of industrial and retail funds during the Global Financial Crisis
- You can have up to 4 people in one Self Managed Superannuation Fund (conditions apply)
- One of the more popular SMSF strategies is to purchase an investment property into a SMSF
- Many lenders offer SMSF loans for SMSF Property
- You can obtain SMSF loans for as high as an 80% LVR against the security property.
- You definitely need to shop around when it comes to SMSF loans as fees can be high and they can vary widely from lender to lender when it comes to borrowing capacity
- You should seek professional financial advice about any SMSF strategies before their implementation
- Bridging loans are designed to allow the purchase of the next house before selling the existing one
- The chosen lender carries the debt for both properties through a ‘bridging loan’
- Standard bridging loans are for 6 months periods, but many can be extended to 12 months
- What happens at the end of the bridging loan period if your existing home isn’t sold? The lender can sell your house and if forced to do so, will do it at fire sale prices
- Bridging loan lenders offer either one of two types of bridging finance. They will be either Peak Debt or End Debt.
- Peak debt bridging loans are much more difficult to qualify for, because they service your income for borrowing capacity on the combined debt for both properties
- • End debt bridging loans make it a lot easier to qualify for bridging finance because your income servicing is calculated on what the final debt will be after your existing home is sold.
- Be aware that the borrowing power through a bridging loan can be limited through LVR requirements as lenders place a fire sale value on your existing property (usually 80% of its real value). This is because they take into consideration they may have to sell it if you can’t sell the old house
Lenders mortgage insurance which is paid by the borrower guarantees that the loan will be paid by the insurance company to the lender in the event you happen to default on the loan
Lenders mortgage insurance is charged at any time the LVR of a loan exceeds 80% on a full doc loan and 60% on a low doc loan
How much is mortgage insurance? This depends on the LVR of a loan. Mortgage insurance is charged on a sliding percentage scale. The higher the loan LVR percentage is the higher the lenders mortgage insurance percentage will be
Mortgage insurance calculator charts show that a loan that is nearer an 80% LVR will incur a premium in the 1% range or less, while loans in the 95% LVR range will can incur premiums in the 4-5% range if it’s a high loan amount.
Most Lenders mortgage insurance companies will not insure loans in excess of $1,000,000
Dealing with lenders mortgage insurance can be a frustrating experience and finding that best mortgage broker to help you with this can be a really good move when it comes to calculating your maximum borrowing power