Making sense of borrowing to buy
When you buy a home, one of the first steps is understanding how you will pay for it.
For 99% of people, this involves a home loan and working with a lender, whether it is one of the big four banks or another institution.
The process involves getting your finances in order, sharing information about your savings, budget and spending activities, and working with a broker to apply for a loan.
How lenders assess your borrowing capacity
Lenders calculate borrowing capacity based on income, existing debts, number of dependents (children) and living expenses. They also apply buffers to ensure you can continue to meet your repayments if interest rates rise.
This process is designed to protect both the lender and the buyer, but it is still important to apply your own judgment. A loan that is approved does not necessarily mean it is the right fit for your circumstances because you have to remember you will be paying it off for decades to come.
Understanding pre-approval
Lenders issue pre-approval for a maximum loan amount once they have reviewed the financial information submitted by your broker. It gives you a clear idea of your price range and shows sellers that you are a serious and prepared buyer.
However, it is important to understand that pre-approval is not a guarantee. Final approval depends on the specific property and any changes to your financial situation. Being aware of this helps you approach the process with the right expectations.
Once you have pre-approval, your broker may recommend you don’t change jobs, take on extra debt or add to your family, as it may change the final amount the bank will approve.
Choosing the right loan structure and support
There are different types of home loans available, each suited to different needs. Principal and interest loans reduce your balance over time, while interest-only loans may offer lower repayments for a set period.
Features such as offset accounts or redraw facilities can also influence how your loan works and how much interest you pay.
Working with experienced professionals, including brokers and agents, can help you understand these options more clearly so you can make decisions that support your long-term goals as a buyer.
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