Do you know how much banks are willing to lend to you? Or how much you can afford to borrow for a home loan?
There are a few key things every first home buyer needs to know before applying for a home loan, including how much you can afford to repay based on your current financial position, and how much a lender will lend to you.
How much can I borrow?
Before lending to you, lenders will calculate your serviceability and your loan to value ratio (LVR).
Serviceability refers to your ability to repay your loan. While each lender uses a slightly different method to calculate serviceability, all rely on factors like your income, expenses and level of debt.
As a basic calculation, lenders will add your net income, subtract your living expenses and debt, and use the balance to determine whether you can afford your home loan repayments. Lenders may also add an interest rate buffer to their assessment to make sure that you can service the loan even if the interest rates go high in the future. After all, the rates will almost certainly rise and/or fall during the course of your mortgage.
Your deposit is an important part of this calculation, and lenders will use your deposit amount to determine your loan to value ratio (LVR). LVR is calculated by dividing the amount of the loan (less your deposit amount) by the value of the property, expressed as a percentage.
For home buyers, an LVR of 80 per cent is usually required, which means essentially, you need to have 20 per cent of the value of the property saved as a deposit. (There are other deposit options available to first home buyers who don’t have a 20 per cent deposit saved up, so don’t despair if you’re struggling to reach that magic number!)
For example: if the property is worth $500,000 and you have a deposit of $100,000, your LVR is 80 per cent ($500,000 less $100,000 divided by $500,000).
While it is still possible to buy a first home with a lower deposit, LVR restrictions imposed by the Reserve Bank of New Zealand can mean lenders are limited in the amount of high LVR lending they can do. They may also charge additional fees for high LVR lending, like Lenders’ Mortgage Insurance (LMI); a set dollar amount or a percentage of your loan amount that lenders charge as insurance to protect themselves against potential mortgage defaults.
Getting pre-approved finance
Before you head out shopping for a new home, it’s a good idea to apply for a mortgage pre-approval.
A mortgage pre-approval is a conditional agreement from a lender confirming the amount they’re prepared to lend to you, provided you meet the conditions of the agreement. Conditions might include getting a registered valuation of the property from an approved registered valuer.
With a mortgage pre-approval, first home buyers can house hunt with confidence, knowing they can secure financing up to a certain amount. Mortgage pre-approvals typically last for 60-90 days, and it’s essential you have a pre-approved finance in place if you plan to buy a home at auction.
It’s also a really handy tool when it comes to negotiating with vendors once you find a home you want to buy. With a mortgage pre-approval in place, you’re in a strong position to negotiate, and you can move quickly to finalise the property sale knowing that finance is already pre-approved.
However, just keep in mind that being ready for a mortgage involves a lot more than just qualifying for a loan. Paying off a mortgage takes years, and you need to be sure you can keep up with your mortgage repayments while still managing your expenses. Before signing a mortgage contact, make sure you understand what you are committing to and whether it’s right for you. Talk to Max Mortgages to help you better understand the potential risks and disadvantages of different mortgage options, so you can make better and well-informed decisions on home loans!
Contact Max Mortgages
Get in touch with the team at Max Mortgages if you have questions about home loans and pre-approvals for first home buyers. Simply request a call with one of our Mortgage Advisers to find out how much you could borrow and how to apply for mortgage pre-approval.