Is my home loan limit based on salary?

Is my home loan limit based on salary?

When you’re shopping for a home loan lenders may put a limit on how much you’re able to borrow based on multiple factors, with salary being one of them. So, you may ask what my limit for a home loan based on my income is?

You’ve found your dream home and are looking to see if you can get a home loan that covers the purchase. In your research, you may wonder if there’s a limit to how much you can borrow based on your salary.

The answer isn’t set in stone and isn’t a one-size-fits-all answer as there are multiple factors lenders will consider. The limit on how much you can borrow is based on your debt-to-income ratio and ability to repay the debt. And not really any specific loan limits set by lenders. In other words, lenders determine your maximum home loan based on salary, current debts and your ability to repay the loan amount.

How much can I borrow for a mortgage?

Lenders take into account a variety of factors when considering a home loan application from a salaried individual. Your credit history plays an important role, as does your employment history and current income. If you have any recurring debt at the time of your loan application, that will also be considered.

When it comes to the question of how much you can borrow for a mortgage on your current income, the debt-to-income ratio (DTI) takes precedence over all other factors. This metric is used by most lenders to determine your capacity to repay your loan comfortably without any financial hardships and is based on your existing debts and income.

Let’s quickly break down the concept of DTI to better understand it.

DTI is calculated based on the amount of money you earn divided by the total of all your debts or liabilities. These debts and liabilities will include credit cards, existing loans, tax debt, etc.

As an example, you’re a couple who both earn $80,000, which is a household income of $160,000. You’re looking at properties costing about $900,000, with 20% deposit so borrowing $720,000 and you both have $2,000 limits on your credit cards. In this scenario, your combined liabilities include:

  • $720,000 for the new home loan
  • A combined monthly limit of $4,000 on your credit card
  • Total debt: $724,000

Your DTI would be calculated by applying the following formula: $724,000 ÷ $160,000 = 4.53 DTI

What this tells you is that your total debt is 4.53 times the combined income.

How does DTI affect my borrowing limit?

Going back to how much you can borrow for a mortgage based on your income. The answer to this question will largely depend on your DTI, which also includes the expected mortgage payments.

You’ve worked out what your mortgage repayments might be and looked at your current liabilities and think you should be sufficient to repay a mortgage. A lender will look at if your monthly payments, including a new mortgage, push your DTI ratio too high. If this happens, some lenders might be reluctant to approve your loan application. A high DTI is generally over 6 (or 6 times your income) and is considered high risk. Lenders think a DTI above 6 could put you under financial stress if your financial situation were to suddenly change, or if interest rates were to rise drastically. On the other hand, if your debt-to-income ratio is below 6 and falls within the lender’s limits, you’re more likely to be eligible for financing.

Don’t let a high DTI discourage you, since it’s not a rigid measurement. Some lenders are more willing than others to take on riskier borrowers with higher debt ratios. That’s why it is important to research a few lenders and understand your options.

How can I improve my chances of getting a home loan approved?

Your debt-to income-ratio may be the first thing considered during your home loan application. Some lenders also give importance to other living expenses. If you’ve got high living expenses, they may be due to high debts, even unused debts. These can make all the difference between approval or rejection of your home loan application.

As you prepare for your home loan application, go through all your debts and see how you can reduce them and cut them out entirely, especially if you don’t use them. For example, if you’ve got a $2,000 limit on your credit card but you hardly ever use it, consider cancelling the card or reducing your limit. You should also look for other non-essential expenses you can cut down on as well. These may include entertainment subscriptions, going to music festivals or sporting events, costly gym memberships, or even eating out regularly.

How does a lender evaluate my ability to repay the loan?

Lenders are primarily focused on your ability to repay the loan and work this out by considering your current income and debt situation. Your credit history or how you’ve borrowed and repaid debts previously is just as crucial when looking at your capability to repay a home loan.

Lenders will also be interested to know how you managed repayments if you’ve previously purchased a property with a mortgage. Demonstrating that you’ve previously managed large debt repayments, can help some lenders be willing to work with a relatively high debt ratio. This is called a ‘compensating factor’.

It’s not just one factor that determines how much you can borrow, for mortgage lenders take into account multiple factors. And while it’s true that the maximum home loan is based on salary, lenders take into account the debt-to-income ratio and your daily living expenses.

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How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.

How does Real Time Ratings work?

Real Time RatingsTM looks at your individual home loan requirements and uses this information to rank every applicable home loan in our database out of five.

This score is based on two main factors – cost and flexibility.

Cost is calculated by looking at the interest rates and fees over the first five years of the loan.

Flexibility is based on whether a loan offers features such as an offset account, redraw facility and extra repayments.

Real Time RatingsTM also includes the following assumptions:

  • Costs are calculated on the current variable rate however they could change in the future.
  • Loans are assumed to be principal and interest
  • Fixed-rate loans with terms greater than five years are still assessed on a five-year basis, so 10-year fixed loans are assessed as being only five years’ long.
  • Break costs are not included.

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Why was Real Time Ratings developed?

Real Time RatingsTM was developed to save people time and money. A home loan is one of the biggest financial decisions you will ever make – and one of the most complicated. Real Time RatingsTM is designed to help you find the right loan. Until now, there has been no place borrowers can benchmark the latest rates and offers when they hit the market. Rates change all the time now and new offers hit the market almost daily, we saw the need for a way to compare these new deals against the rest of the market and make a more informed decision.

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.

What factors does Real Time Ratings consider?

Real Time RatingsTM uses a range of information to provide personalised results:

  • Your loan amount
  • Your borrowing status (whether you are an owner-occupier or an investor)
  • Your loan-to-value ratio (LVR)
  • Your personal preferences (such as whether you want an offset account or to be able to make extra repayments)
  • Product information (such as a loan’s interest rate, fees and LVR requirements)
  • Market changes (such as when new loans come on to the market)