Mortgage Income Multiples

[WayneM]

Hi,

 

I was wondering if anybody knows of any rule of thumb scenarios used in order to work out how much lenders will likely end in Australia? (My assumption is that these would be fairly generic across the country)

 

The equivalent rule of thumb in the uk (based on my knowledge anyway) would be that a single mortgage applicant would be able to borrow 4 to 5 times their income. In order to achieve this, you normally have to have the first 10% of the purchase price available, referred to as the deposit.

 

I did a bit of research on this a couple of months back that suggested that some of lenders will lend up to 7 times income with 5 times being more typical, and that additional insurance is required for high LTV mortgages.

 

Thanks :)

[NickyNook]

Doesn't work like that here. Using a multiple of an applicant's income is unreliable as it takes no account of how many people that income is supporting (single person or a family of 6?) or other fixed payments (personal loans, maxed out credit cards, school fees and the like) that the income is servicing.

The method here is to take the net income figure, deduct an amount that you and the number of your dependants is deemed to need for food and other essentials, deduct all other loan and fixed payments and the figure that's left is available to service a loan. The borrowing amount is calculated from this net income figure based on the interest rate of the day. Obviously this amount will vary enormously depending your personal circumstances. To get an idea of how much you personally can borrow, just fill in a few mortgage applications on line.

Banks have been in trouble in the past for lending too much so beware of using all that you may be offered. Daft people have done this and then been surprised that they don't have enough cash left over to feed their kids. 

[Guest Carol from Vista Financial]

Hi @WayneM

@NickyNook is right. There used to be some multiples in play back in the day, but it is not that simple these days, especially now with the Royal Commission! Frankly it is a good thing as what you can be shown to afford on paper can often be very uncomfortable coming out of your wallet and thus may not be right for you anyway! A prudent lender/broker will walk you through this, but unfortunately has often not the case.

Lenders will assess how much to lend you based on (in no particular order):

(1) Your income

(2) Your deposit (as a percentage of the purchase price)

(3) Your expenses

(4) The overall risk of the transaction (the loan to value ratio and loan size are some examples, among others)

A basic multiple simply can't take into account all of the above.

(1) So, income needs to be 'acceptable income' to the bank - regular, consistent and ongoing (they will only accept certain percentages if deemed riskier or unreliable income, and some lenders will simply not accept some types of income at all).

(2) If you have savings worth 20% of the purchase price PLUS enough for funds for costs (stamp duty, council rates, conveyancing etc.) this will open a lot of doors for you as if you are borrowing under 80% it is less riskier. If you don't have this then you would be applying to borrow over 80% and will be charged lenders mortgage insurance - which protects the lender, not you.

(3) There is a special focus on living expenses at the moment. A lot of lenders historically have been using a benchmark for expenses (Household Expenditure Measure - HEM) which is essentially supposed to represent a standard figure of spending for a person depending on certain circumstances. Not surprisingly the one size fits all approach is flawed and now more than ever there is a focus on trying to capture what you are actually spending.

So, you make an estimate, someone  goes through your bank accounts with a fine tooth comb to verify what you actually spend, this new (likely higher) figure is then used in the end to help determine your borrowing capacity. At the end of the day, after all your outgoings are accounted for (with buffers for any existing debts) what surplus do you have to make a monthly mortgage repayment with. Add another buffer for rises in rates/unforeseen circumstances/variations in income and expenditure, keeping a surplus per month at the end - that is the maximum you can apply for, it it all stacks up. Which leads us to the last point...

(4) Risk and consequence - can you repay it comfortably without a risk of the lender having to sell the roof over your head? What is the likelihood of something going wrong and what is the worst case scenario if it did? Lenders want to minimise any losses - financial or otherwise. If there is a whiff that something in your circumstance may make the transaction riskier, lenders will smell it, and either want to mitigate the risk, or avoid it like the plague. Last thing they want is to lose money by foreclosing or ending up on Today Tonight, or both!

All in all if you are trying to estimate what you can afford you can use these calculators to try cover as much as you can of the above:

Borrowing Power Calculator

Stamp Duty Calculator

The first focuses on the income/expenditure side of things, the second helps in determining much deposit is needed to make it work (but you need to allow for extra costs).

At the end of the day the only true way to know what you can borrow is to submit an application and get a fully assessed pre-approval from a lender. Failing this get a lender or broker to run an estimate for you. Happy to help if you want me to do this for you.

We are already seeing a shift in what lenders are willing to approve and this is likely to get worse in relation to the living expenses HEM Gate. So be wary of your expectations, there are lots of people who have home loans currently that would be declined if they tried to apply for the same loan today. Go in with conservative expectations in mind to help avoid any disappointment.

Hope this helps!

 

[WayneM]

Thanks. If the income multiples concept doesn't exist, then that would explain why I couldn't quickly Google it!

The affordability checks apply here in the UK to, but I always get the impression they are to refine from the income multiples figure and reduce based on lifestyle commitments.

Over here in the UK, the general advice seems to be to live as frugally as possible in the months before a mortgage application to reduce the risk of lifestyle issues impacting your potential lending.

I kind of have the hope that in Australia the banks lending criteria allow adult lenders to make their own responsible decisions. Things went a bit crazy here (from my perspective) after the 2007 crash.

[Guest Carol from Vista Financial]

Just checked Google and can see what you mean!

Makes sense to refine, but I guess if the refining process makes the multiplier null and void may make it a less useful tool in the first instance?

Understand your point, normally last 3 - 6 months expenditure will be looked at but from a responsible lending perspective the idea being don't change a thing and see what you can afford based on that (worst case scenario?). But, I also understand that once you get a mortgage your spending habits may well change as a result of it, but unfortunately a change for the better is not guaranteed. 

Yes this is a fair argument - if I, as a responsible adult, sign on the dotted line I bear the responsibility of my actions. At the risk of opening a can of worms here I will just say firstly that overwhelmingly what has come out in the Royal Commission has shown a huge lack of care, due diligence and general disregard of select lenders/brokers/other financial services staff when it comes to doing the right thing. This is simply un-excusable.

There is of course the argument of when do we take ultimate responsibility for our actions. Unfortunately, there are cases that when things go wrong (even at our own doing as responsible adults or not) we will want someone else to blame (as is the case with a lot of things in life!). Sometimes it is the case that someone should have told us. When that is the case the argument is that if you are relying on the advice of a professional then it is their responsibility to essentially protect you from yourself. Understand this can add processes that cause frustration for others.

[s713]

It's in everyone's interests to look properly and frugally at what they can actually afford and not what the bank will lend them. There was a feature on the news last night about the record number of people asking for mortgage holidays and 'relief', and this is whilst interest rates are at a record low. Very easy to come unstuck here, credit is easy to get, sometimes difficult to pay off. I know a couple with normal jobs who have hundreds of thousands of credit card debt, they will never pay it off, will affect the rest of their lives. All because they wanted to live on a fancy estate and the bank said 'yes'.

[Guest Carol from Vista Financial]

Agree @s713, ideally it would be great to start with your budget, see what money you would be able to allocate to a mortgage repayment, and work backwards from there as to what loan size and purchase price that would equate to. More often than not it's a case of: 'let's see what the maximum we can get from the bank and take that''. Or worse, let's go to open inspections without getting a professional opinion and (unfortunately) set ourselves up for disappointment!

Yes, getting a maximum lend estimate can help in narrowing things down if what you are approved for is lower than you though or you have absolutely no idea what the ball park may be. But if it is higher, then excitement can take over, closely followed by the 'we will make it work' thoughts/hopes. What is deemed 'affordable' by a bank can be very different to what is affordable coming out of your wallet every month and one size does not fit all. Extra scrutiny in how lenders assess living expenses is one way regulators are trying to account for this.

Most people can easily tell me what their ideal purchase price range is, fewer start the conversation with what out-of-pocket-per-month they are comfortable with. And if there is a whiff of a higher loan approval possibility (and ultimately of course a 'nicer' house) suddenly the comfortable repayment level that was once hard and fast becomes flexible.

Yes rates are very low still and it will be a shock to the system for many that have only known low rate environments when they eventually go up again. The RBA knows it and have flagged this as something to prepare for.

I am sorry to hear about your friends' circumstance. Have they sought any help to try get out of the debt/make it as manageable as possible? Free help is out there: https://www.moneysmart.gov.au/managing-your-money/managing-debts/trouble-with-debt but does take time and effort, and can seem fruitless, especially if they are drained mentally, which they would be if under financial stress.

 

[s713]

Good advice Carol.

They're mates of the in-laws moreso than ours and, yes, they are taking steps to address this but, it will never, ever right itself; too far gone. The wife now has stress-related health implications as a result of it all which compounds their ability to plan. It's a mess and could/should have been avoided.

Thanks.

[Guest Carol from Vista Financial]

No worries.

I was worried that may be the case as certainly takes it's toll. Glad to hear they are taking steps to try help, so long as they are wary of credit repair companies etc. as in the first instance free help is the best first step: http://www.ndh.org.au/

Seeking help for the health implications is just as important, these may help her if she is not aware of them already:

https://www.beyondblue.org.au/get-support/get-immediate-support

https://www.healthdirect.gov.au/mental-health-helplines

Yes it may well have been avoided, which they are no doubt unfortunately realising now in hindsight.

If they are not sure of next steps or have any mortgage issues etc. I am happy to chat to them. Not a debt specialist but happy to help where I can.

[s713]

Notice Westpac raised interest rates this week.

Also saw this in the news today.

Edited August 31, 2018 by s713

[Guest Carol from Vista Financial]

They sure did! I made some comments here:

Hmmmm, wonder how they came up with the 'costs', have you got the link to the original so I can take a peek please @s713?

[s713]

Hi Carol, it was on news.com.au today. On train, will find the link later.