The first step towards home ownership involves a little introspection. You need to take a long, hard look at yourself and determine what you are planning in the years ahead and how much you can afford to repay.
Begin with your total monthly income. Use the after-tax income of both you and your spouse (if applicable), regular income you get from term deposits, cash management accounts, share dividend or property investment. This becomes your total monthly income.
The next step is to determine your monthly expenditure. This is a little trickier than determining your income, because your cash is likely to go towards a number of different places over the course of a month. Obvious categories of expenditure include food, clothing, electricity, phone, gas, medical, insurance, entertainment, personal, car, transport, childcare, credit cards – the list goes on. Don’t include your current rent if you are purchasing a home to live in, if things go well, you won’t have to pay rent for much longer.
Subtract your total monthly expenses from your total monthly income and (hopefully) you will have a healthy positive number that is roughly what you can afford to repay each month on a loan. Now if the figure you arrive at is suspiciously high, look carefully at your expenses. If the figure suggests you can save $2,000 a month, and you’ve only ever been able to save $1,000 then clearly you’ve left a few expenses out. People are creatures of habit – if you haven’t saved before, you’re going to find it difficult to save now. Be honest with yourself from the outset. There are no prizes for having the biggest house and then not being able to afford to live in it.
With the numbers under control, you also need to consider more abstract thoughts, such as where you think your career is headed financially, whether you or your spouse are considering raising a family and what impact this might have on your ability to service your loan.
Now that you know the total amount you can devote to mortgage repayments each month, you can determine roughly how much you will be able to borrow. This amount will vary from lender to lender, and many now have handy calculators on their web sites that allow you to determine the amount of money they are prepared to part with. There is also an affordability calculator on the Your Mortgage web site that calculates a very conservative estimate of the amount you will be able to borrow and the costs you will face depending on the State you are purchasing in.
As a professional mortgage broker we are kept abreast of both the lending criteria and the maximum lending calculations used by the banks. These calculations, which vary from one lending institution to another, are the method used when working out if they will firstly lend to you and secondly how much they will lend to you. As we deal with most of the major lending institutions across Australia we are able to calculate the specific maximum loan amount from a variety of lenders.