Saturday, March 2, 2024

LOUISE FAIRSAVE: How much can I borrow?


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Today, we look at the borrowing ability of would-be mortgagors. The amount that can be borrowed is controlled by the lender and by the borrower in different ways.
The main criterion that the mortgagee looks for in considering an application for a loan is the level of the pretax income of the borrower(s). As a basic rule, most lenders will baulk at entering into a mortgage agreement where the repayment represents more than a third of the applicant’s pretax income.
The mortgagee will state early the maximum mortgage that will be considered provided that the income criterion is met. That is, some mortgagees will lend the full 100 per cent cost of the property.  
Other mortgagees will lend up to a maximum of say, 85, 90 or 95 per cent.   
Richard wanted to mortgage a home costing $160 000. His mortgage company was willing to provide 100 per cent loan financing. Richard earned $2 800 per month. A third of his pretax income, approximately $1 000, was much lower than the monthly installment required.
Yet, Richard had other black marks against his application like his age and his past credit worthiness. Eventually, Richard was offered a loan for maximum of 80 per cent of the property.
Where two or more people apply jointly for a mortgage, the lender will consider the nature of the relationship between the parties, as well as their joint pretax income. A married couple applying jointly for a mortgage presents one of the strongest bonds.     
The mortgagee will also consider the occupation and employment history of each applicant. How secure is the area of occupation? What are the risks of loss or reduction in income?
The applicant’s past credit history is also relevant. Has there been late or no repayments on other loans in the past? Does the applicant demonstrate a willingness to keep the lender informed in situations where the applicant is unable to meet the instalments? Has the applicant serviced past loans successfully?
Lenders always require applicants to provide a statement of their current financial position, typically called a statement of affairs. This report provides the lender with some insight into the applicant’s assets and liabilities and particularly into the applicant’s propensity to borrow.   
How much you can borrow is also controlled by you in deciding early how much you would be willing to compromise your lifestyle for the sake of servicing the mortgage. A mortgage usually makes significant inroads in the amount of funds available to go out for dinner, attend shows, take overseas trips and other entertainment, and discretionary spending.
Don’t fool yourself beyond your capacity to bear the impending constraints. Decide upfront what lifestyle sacrifices you are willing to make and keep your loan repayment within that scope.
Finally, it is in your interest to keep a cash hedge against unforeseen circumstances that may upset your mortgage repayment plans. The amount of this hedge will depend on how you see your risks, but a minimum of three months’ mortgage payment is suggested.


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