When you’re looking to buy a house, it’s pretty natural to look at “how much will the bank lend us”?
But while borrowing capacity (how much can I borrow?) gets all the attention, funding position is equally, if not more important when assessing how much you can spend on a property. So many times a client has heaps of borrowing capacity, but doesn’t have the funding position to get the deal.
Funding Position is a calculation that adds up all the costs of buying (or refinancing) a property, and then subtracts the funds you have for a deposit (or available equity), and the amount a lender will lend you.
The reason why funding position often falls short is a combination of;
- Insufficient equity/deposit
- Loan to value ratios (LVR)
- Purchase on-costs (e.g stamp duty)
So even though you’re borrowing capacity might say you can borrow $1,500,000, your funding position says no deal.
This is often the case where people have used borrowing capacity calculators. They’ve read our blog on what lender’s use as income and plugged that and their expenses into the calculator and it comes back with a number they’re happy with.
They start hitting up realestate.com.au and get emotionally invested in houses at a particular price bracket.
Now if this person goes to a mortgage broker (or their bank direct) for pre-approval then this bubble might get burst before too much damage is done.
But if they find a place and whack a contract on it because they don’t want to miss out and the borrowing calculator said they could borrow X, and then come to us, it can be quite the conversation to say you can’t afford it.
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Let’s say this couple has a business that has been growing quickly and the borrowing capacity based on their income is $1,500,000. Nice one.
So they find a house of $1.5mil, they have $150k in savings which is 10%, so they think they’re fine because the calculator said they could borrow $1.5mil, and they’ll only need a 90% of that.
But here’s what the math says…
|
Purchase Price |
$1,500,000 |
|
Transfer Duty (QLD) |
$59,600 |
|
Transfer Fees (QLD) |
$5,079 |
|
Mortgage Registration Fee |
$195 |
|
Legal Fees (estimate) |
$2,000 |
|
LMI (estimate) |
$32,245 |
|
Total Cost |
$1,602,239 |
|
Less Loan at 90% LVR |
$1,350,000 |
|
Funds Required |
$252,239 |
|
Savings |
$150,000 |
|
Net Shortfall |
($102,239) |
Oh Shit.
What if we go to a lender who will do a 95% LVR?
|
Purchase Price |
$1,500,000 |
|
Transfer Duty (QLD) |
$59,600 |
|
Transfer Fees (QLD) |
$5,079 |
|
Mortgage Registration Fee |
$195 |
|
Legal Fees (estimate) |
$2,000 |
|
LMI (estimate) |
$66,543 (umm, ouch) |
|
Total Cost |
$1,633,537 |
|
Less Loan at 90% LVR |
$1,425,000 |
|
Funds Required |
$208,537 |
|
Savings |
$150,000 |
|
Net Shortfall |
($58,537) |
Still Poo. Maybe the parentals will give them an advance on the inheritance.
This is why funding position needs to be given as much consideration as borrowing capacity.
It’s not just about what you can afford to repay, it’s about how much you need to complete the transaction. Your borrowing capacity is just one component of that.
So when you’re looking to buy a property it’s important that you look at the on-costs, because as you can see above, these can really take the jam out of your doughnut.
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In general, if they wanted to avoid LMI and only borrow 80% of the value of a property, they could afford no more than a $650,000 house.
If they were willing to go into LMI territory and really push the boundaries to a 95% LVR. They could go to $1.1mil (depending on the lender and LMI costs).
|
|
At 80% LVR |
At 95% LVR |
|
Purchase Price |
$650,000 |
$1,100,000 |
|
Transfer Duty (QLD) |
$15,100 |
$36,600 |
|
Transfer Fees (QLD) |
$1,934 |
$3,599 |
|
Mortgage Registration Fee |
$195 |
$195 |
|
Legal Fees (estimate) |
$2,000 |
$2,000 |
|
LMI (estimate) |
$0 |
$48,798 |
|
Total Cost |
$669,349 |
$1,191,312 |
|
Less Loan |
$520,000 |
$1,045,000 |
|
Funds Required |
$149,346 |
$146,312 |
|
Savings |
$150,000 |
$150,000 |
|
Net Surplus |
$651* |
$3,688 |
*Man that’s tight. Check the couch for more coins.
So before you get emotionally invested in realestate.com.au, please check not only your borrowing capacity, but also your funding position against your appetite for risk (e.g how big a mortgage do you want? how worried about rising interest rates are you? etc).
Or just get in touch and we can help.