Explainer: How lenders work out whether you can afford a loan
Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea.
Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.
Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.
Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through.
“What is very important is that people understand the ramifications of exposing themselves to debt,” says Andrew Crossley, Homeloans Business Development Manager and best-selling author of Property Investing Made Simple.
“When modelling costs, an adviser would be wise to be very conservative in the figures they are using.”
Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan.
“APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have,” Crossley says.
The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7-8%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.
Michael Schipper from Talk Home Loans is a home loan specialist and mortgage broker based in Brisbane. Contact him about how to maximise your results from your home and investment lending.