Are you an Australian expat who wants to buy a property in Australia? If so, you may be wondering how much you can borrow from a lender. In addition, what factors affect your borrowing capacity? Your borrowing capacity is the maximum amount of money that a lender is willing to lend you based on your income. It is also based on your debts, credit history, deposit, loan type, interest rate, and property value. We will also provide some tips on how to boost your borrowing capacity. You can also find the best loan option for your needs and goals.
Some of the factors that affect your borrowing capacity as an Australian expat are:
Your income
Your income is a key factor that significantly affects your borrowing capacity in Australia. Lenders will look at your gross income, net income, and the currency of your income. Some lenders will use your foreign tax rate when calculating your net income, which can help boost your borrowing power, especially if you live in places with low tax rates, like Hong Kong or Singapore. However, some lenders will only accept certain currencies, such as US dollars, British pounds, or Singapore dollars, and may discount your income if you earn in less stable currencies.
Your debts
Lenders will also look at your debts when assessing your borrowing capacity. This includes your credit cards, personal loans, student loans, car loans, and any other outstanding debt. Having high debt will reduce your borrowing power and some lenders may reject your loan application altogether if the amount of debt is high or can’t be justified. Therefore, it is advisable to pay off or reduce your debt as much as possible before applying for a loan.
Your credit history
Your credit history is another important factor that affects your borrowing capacity. Lenders will check your credit score and credit report to see how you have managed your previous and current loans and credit cards. Having a good credit history will increase your chances of getting approved for a loan and getting a lower interest rate. However, having a bad credit history will lower your borrowing power and may result in higher interest rates or loan rejection. Therefore, it is important to maintain a good credit history by paying your bills on time, avoiding late payments, defaults, or bankruptcies, and checking your credit report regularly for any errors or fraud.
Your deposit
Your deposit is the amount of money you have saved or invested to buy a property. Having a larger deposit will increase your borrowing capacity and reduce the amount of loan you need to borrow. It will also show the lender that you are a serious and responsible borrower who can save and manage your money well. However, having a smaller deposit will decrease your borrowing capacity and increase the amount of loan you need to borrow. It may also require you to pay for lenders mortgage insurance (LMI), which is an extra cost that protects the lender in case you default on your loan. Therefore, it is advisable to save up at least 10% of the property value as a deposit, plus extra funds to cover the property purchasing costs, such as stamp duty, conveyancing fees, and inspection fees.
The type of loan you choose
The type of loan you choose will also affect your borrowing capacity. There are different types of loans available, such as variable rate loans, fixed rate loans, interest-only loans, principal and interest loans, and so on. Each type of loan has its own advantages and disadvantages, depending on your financial situation and goals. For example, variable rate loans offer more flexibility and lower interest rates, but they also expose you to the risk of interest rate fluctuations. Fixed rate loans offer more stability and certainty, but they also lock you in for a certain period and may charge higher interest rates.
Interest-only loans allow you to pay only the interest for a certain period, which reduces your monthly repayments, but they also increase the total amount of interest you pay over the life of the loan. Principal and interest loans allow you to pay both the interest and the principal, which reduces the loan balance and the interest cost, but they also increase your monthly repayments. Therefore, it is important to choose the type of loan that suits your needs and preferences, and to compare different loan options and features before making a decision.
The interest rate
The interest rate is the cost of borrowing money from the lender. It is expressed as a percentage of the loan amount per year. The interest rate affects your borrowing capacity because it determines how much you have to pay back to the lender each month and over the life of the loan. The lower the interest rate, the more you can borrow and the less you have to pay back. The higher the interest rate, the less you can borrow and the more you have to pay back. Therefore, it is advisable to look for the lowest interest rate possible, but also to consider other factors, such as the loan term, the loan features, the fees and charges, and the customer service of the lender.
The value of the property
The value of the property is the market price of the property you want to buy. It is determined by various factors, such as the location, the size, the condition, the features, and the demand and supply of the property. The value of the property affects your borrowing capacity because it determines the loan to value ratio (LVR), which is the percentage of the property value that you can borrow from the lender. For example, if the property value is $500,000 and the LVR is 80%, you can borrow up to $400,000 from the lender.
The higher the LVR, the more you can borrow and the less deposit you need. The lower the LVR, the less you can borrow and the more deposit you need. However, having a higher LVR also increases the risk of negative equity, which is when the loan balance exceeds the property value, and may require you to pay for LMI. Therefore, it is advisable to have a realistic and accurate valuation of the property you want to buy, and to avoid overpaying or underpaying for it.
Conclusion
These are some of the factors that affect your borrowing capacity as an Australian expat. However, there may be other factors that are specific to your situation and goals. Therefore, it is recommended that you consult a professional mortgage or financial adviser who can help you assess your borrowing capacity and find the best loan option for you.
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