With low rates and a booming property market, it’s no wonder Australians are lining up to get in! So this week I wanted to share 10 things you should know before you take out a mortgage.
- Low rates aren’t always that easy to get!
There are some great low rates available right now, but often there are stricter criteria you need to meet to access them. Things like a good credit score, no previous late repayments on any debts and more than 20% equity, can be important.
- Credit cards count as debt even if you have no balance.
If you have a credit card, lenders will typically factor in about 2-3% of the approved limit – not your current outstanding balance – per month as an added financial commitment. A $20k credit card limit could reduce your borrowing capacity by around $70-$80k. That’s roughly three to four times the limit of your credit card.
- Just because you think you can afford it doesn’t mean the lender agrees…
Each lender will estimate a minimum amount of living expenses based on whether you’re applying as an individual or a couple, where the property is and the number of dependants you have. So even if you run a lean budget, they will use the higher of your figure or theirs to do their calculations. It is also important to note that lenders distinguish between basic living expenses and discretionary expenses – and their definitions will probably vary to yours! For example, child care fees are often counted as a discretionary expense (I can see the parents’ shocked faces from here!)
- But don’t just trust what the lender says you can afford either!
It’s important to look at your own financial capacity in real terms, rather than counting on the lenders’ assessment. Look at what the actual repayments would be at higher interest rates (say 6%, 7% and 8%) and make sure you are comfortable that you could afford the repayments.
- Rules differ from lender to lender.
Each lender has their own way of calculating how much you can afford to borrow. In general, they decide how much risk they are willing to take on a loan, factoring in your personal circumstances like employment, where the property is located and the type of property. And the differences between lenders can be significant.