Often, the banks maximum borrowing capacity is below your highest comfortable repayment. This can be due to many factors, some of which I have outlined here;
– Although the interest rate is below 2% for fixed and low 2%’s for variable on an owner-occupied product, the bank is using a stressed ~5.5% interest rate to assess the loan. Taking a $1,000,000 monthly loan repayment from the actual ~$4,000 to ~$5,700 in the banks model on a standard 30-year term. 30% higher!
– It’s a common misconception that if the rent from an investment property covers the repayment, the bank will give you the loan. This is not the case. The bank will discount the rental income by 20% or 30% to account for vacancy and repairs. Still stressing the loan as outlined in the above point.
– The bank will not assess you based on an actual interest only repayment, the repayment will be converted to principle & interest over the remaining principle & interest term at 5.5% stressed rate.
– Any other income type than base income may be discounted, commonly for example with bonus/commission income which is discounted by 20%.
– The bank will use a minimum living expenses figure for you too, so even if you only spend $2,000 per month, the bank may actually be using $4,000 per month.
All these things plus others combine to reduce borrowing capacity below where your comfort level lies for new mortgage repayments. There are things we can do to improve borrowing capacity, (on the proviso we work through affordability and comfort of repayments of course). So reach out if you need help. Tom.
Written by Tom Morison