Navigating Your Borrowing Capacity in Response to Shifts in the Property Market
Take on a home loan is one of the most significant financial decisions of your life – but how can you determine how much to borrow in light of an ever-evolving interest rate market?
Home buying is an enormous financial commitment and, with an ever-evolving real estate market, buyers may face difficulty in navigating a challenging lending landscape.
Changes to interest rates can significantly raise the cost of borrowing, leading to greater monthly mortgage repayments.
Interest rate fluctuations erode individual’s borrowing power, affecting their eligibility to qualify for larger loan amounts as lenders adjust repayment amounts accordingly.
Dr Michael Baumann, Commonwealth Bank’s Executive General Manager for Home Buying, is confident there are still ample opportunities available to first-homebuyers looking to break into the property ladder.
Here, he outlines exactly what changing interest rates mean for your loan and how they may still help you find a home you love.
Here are seven strategies that will help you better comprehend your borrowing power in today’s market.
1. Assess Your Current Financial Situation
To begin with, conduct an in-depth examination of your current financial status. This should involve calculating monthly income and expenses as well as any debts or financial obligations you may owe.
Knowing how much of a monthly mortgage payment you can comfortably afford is essential in determining how much money can be borrowed.
Dr Baumann states: When we determine how much a customer can borrow, it’s essential that there are safeguards in place so they will be able to meet their home loan repayments should interest rates increase.
2. Utilize online calculators Before entering into any loan agreement, it is crucial to know exactly how much money is available to borrow as well as any possible interest rates and payments that could arise. By making use of an online calculator it will give an accurate indication of this information.
Calculators available online can assist in estimating how much of a loan you can afford and the monthly repayments, depending on factors like loan amount, interest rate and term.
“Customers can quickly determine their borrowing capacity using our Borrowing Power Calculator by inputting their income and expenses to see how much money might be available,” according to Dr. Baumann.
3. Reduce Debt
Lenders use your debt-to-income ratio when assessing borrowing capacity.
Your borrowing power could increase by paying off or reducing existing debts such as credit card balances, personal loans, car loans or HECS loans.
Dr Baumann notes that various factors impact how much of a loan a customer can borrow for their home purchase loan.
Lenders typically consider customer income and expenses, the amount saved for a deposit, savings history and credit rating as criteria to approve home loans for customers seeking home financing. Furthermore, lenders need to be cognisant of both type and length of home loan requested as well as property cost when providing home loans.”
4. Take Advantage of First Home Buyer Grants and Schemes There are various government initiatives designed to make home ownership more cost-effective for eligible households on their journey towards success, including grants and programs dedicated to first-time home buyer support.
First Home Owner Grant (FHOG): The FHOG is a national program offering one-time grants to eligible first-time homebuyers across states and territories, though its specific details vary between jurisdictions.
First Home Guarantee (FHBG): The FHBG is a federal government initiative created to assist first-time home buyers purchase properties with deposits as low as 5% without incurring lender’s mortgage insurance costs (LMI). Under this scheme, the government guarantees part of each loan, making home loans more readily accessible.
First Home Super Saver Scheme (FHSSS): The FHSSS allows first time buyers to save for their first home within their superannuation fund using this scheme, contributing money that may later be withdrawn along with any associated earnings under certain conditions.
Stamp Duty Concessions and Exemptions: Various state and territory governments provide stamp duty exemptions or reductions for first home buyers who meet specific eligibility criteria, with each jurisdiction offering different amounts and eligibility criteria for concessions/exemptions on stamp duty (also referred to as transfer duty). The amount and eligibility criteria can differ.
5. Get Conditional Mortgage Pre-Approval
Securing pre-approval for a mortgage gives you a clear idea of your borrowing capacity while showing sellers you’re serious.
Conditional pre-approval lasts 90 days, providing you with plenty of time to find an ideal property within budget. At any point after 90 days have lapsed, provide updated financials to the lender who will verify if the loan still meets your individual needs in light of changing market conditions.
With this knowledge in your possession, you can act quickly when an attractive property becomes available – giving you an advantage over buyers whose finances may not be in order.
Commonwealth Bank makes getting conditional pre-approval simple and swift with their 15-minute conditional pre-approval application, so that you can quickly start searching for your ideal home.
6. Be Flexible
It is crucial that when searching for property it is done so with flexibility in mind to find one which best meets both your needs and your financial circumstances, as an interest rate change could mean your borrowing power has changed from when you started searching. According to Dr Baumann this flexibility will allow them to locate their dream property more quickly.
Dr. Baumann suggests it is vitally important when searching for property to keep this in mind and frequently contact your Home Lending Specialist so as to better understand your borrowing capacity and current loan eligibility.
“To help narrow down your property search, our Home Lending Specialists offer free and unlimited customised property and suburb reports that enable customers to make informed property decisions.”
7. Seek Professional Advice
Home buying can be an arduous journey for first-time home buyers who may have never gone through it before. Experts offer additional advice and can help explain all your available options based on individual circumstances.
Dr. Baumann states, “Every customer has unique circumstances and needs.”
“Anyone looking into purchasing real estate should speak with one of our Home Lending Specialists as soon as they begin the search process.”
“Our lenders will work closely with you to assess this with regards to your property goals and timeline, while providing more details on any tailored rates or discounts you might qualify for.”
