How Does a Lender Assess My Borrowing Capacity?
When you apply for a mortgage, the lender will use a standard equation to determine your borrowing capacity. This number will allow them to determine the loan amount you can pay back. The bank uses your gross income, tax, existing commitments, new commitments and living expenses to determine your monthly surplus. Gross income To calculate your gross income, banks will consider your base income, Family Tax benefits and rental income from properties you own. Some banks may utilise overtime, bonuses and commission as part of their equation if these are regular income. Tax Each lender has its own way of calculating tax expenses. Mortgage brokers can help you determine which lenders they have relationships with will calculate your tax expenses favourably. Existing Commitments Lenders will analyse your current mortgages and other loans along with 2-3% of your credit limit to determine your existing commitments. New Commitments To calculate your new commitments, banks will use a rate 2-3% higher than your actual mortgage interest rate. This higher calculation will provide you with a safety net in case of increased interest rates. Living expenses Banks will calculate two forms of living expense: your estimated cost of living or the average minimum cost of living for your family size or HEM (Household Expenditure Measure). The higher of these two figures is what banks use in their equation. The first adult and child are calculated at a higher expense than subsequent adults and children, ensuring that you can still pay your mortgage while supporting your family. Using the values above, lenders will calculate your borrowing power. Mortgage House and its expert team of brokers know how each lender calculates borrowing capacity and what other factors they may consider when reviewing loan applications. They can help you choose the lenders that will approve you for a favourable loan.
What is Equity Release?
An equity release, also known as a top-up loan, is a loan that is added on to your current mortgage. Not all reasons for wanting to release equity from your home are acceptable. Lenders accept the following reasons as valid: Investing: buying another property, buying a business, purchasing shares in a business or investing in your own home by performing minor renovations. Purchases: holidays or cars Consolidating debt How much equity is released? The equity that you can release from your home depends on the lender, the equity available, your loan to value ratio and your finances. In general, the minimum amount you can add to your mortgage is between $10 and 20 thousand. However, your lender will decide the maximum amount you can release. Application process A separate application is required, but you will not need to supply all the documentation that was needed for the first mortgage loan. If you are applying for a standard release of $10,000 or more, supplying the lender with your last few payslips and a group certificate is all that is needed. Occasionally, a lender will ask you to supply evidence for the intended purpose of the release. Normally, the following documents may be needed: If you are buying property, you can provide a letter confirming you are searching from your conveyancer. If you have bought a property, you can provide a copy of the sale contract. If you want to consolidate debt, you can provide your bank statements from the last few months as evidence of regular debt payments. If you want to renovate your home, you can provide building contracts and copies of the contractor’s quotes and specifications. If you are investing or purchasing shares, your financial planner can write a letter or draw up a financial plan. The lender will then perform a property valuation to determine how much equity you have before approving your loan. Mortgage House is Australia’s largest independently owned non-bank lender that is committed to ensuring our customers’ needs are met. We want to provide our customers with the tools and knowledge they need to understand the financial aspect of homeownership. Our team of brokers can help find you the best top-up loan options that reflect your needs.