How much home can you afford with your salary?

Discover how you can fine-tune your property search by having a realistic price tag up your sleeve.

How much home can you afford with your salarySearching for the right property is a time-intensive task as it stands.

From deciding on property type and features to must-have postcode amenities and services, there are several variables to consider. However, you can be more efficient (and savvy) about finding the right abode if you understand the price range that you can afford from the outset.

Identifying a property price that will fit your lifestyle and homeownership needs can save you time and money during the property search phase. You can rule out properties (and locations) that are beyond your financial means and focus on the ones that represent a realistic investment.

So if you’re on an annual paycheque of $50,000, $75,000 or $100,000+, what property price could you set your sights on?

We posed the question to Jason Thomson at Smartline Personal Mortgage Advisers to crunch the numbers.

How will a lender review your borrowing power?

JasonThomsonSmartlineWhile it’s not a one-size-fits-all approach, a common maximum affordability figure is to use 30% of an applicant’s gross income. That is, a lender will allocate 30% of your gross income to mortgage repayments to forecast your borrowing power.

“Finance industry regulators have tightened loan assessment procedures and now every applicant will need to provide an estimate of their living expenses,” Thomson says. “Lenders have a 'default' minimum amount for this and will adopt the greater of their default or the applicant's estimated amount.

“Interest rates are at an all-time low, and borrowers can expect to be charged somewhere within the range of 4% to 5% per annum. Over the course of a 30-year loan, it's quite probable that interest rates will increase, so lenders 'test' an applicant's affordability at an 'assessment rate' of around 7% per annum.”

How can you estimate an affordable property price?

Once you’ve reviewed your borrowing power, a broker can review your financial position to estimate a property price that you can afford.

This is how it works: take 30% of your annual gross income, equate this into a loan amount using an average rate of 4.5%, take a 5% deposit (if you’re a first home buyer, it’s likely that you will have the minimum deposit amount), and then use this to estimate a potential purchase price.

Assuming that the applicant doesn’t have any debts or liabilities, and using a rate of 4.5% over 30 years, here are three scenarios:

Scenario 1 - $50k income

$50,000 annual gross income - 30% = $1,250 per month at 4.5% p.a., which equates to a loan amount of $246,000.

With a 5% deposit contribution, the maximum affordable property price would be $260,000.

Scenario 2 - $75k income

$75,000 annual gross income - 30% = $1,875 per month at 4.5% p.a., which equates to a loan amount of $370,000.

With a 5% deposit contribution, the maximum affordable property price would be $390,000.

Scenario 3 - $100k income

$100,000 annual gross income - 30% = $2,500 per month at 4.5% p.a., which equates to a loan amount of $493,000.

With a 5% deposit contribution, the maximum affordable property price would be $520,000.

Find out if your estimated property price is enough to live in your dream suburb.

How can first home buyers prepare for homeownership?

Thomson says that first home buyers should test their ability to manage their proposed loan repayments for three to six months prior to taking out a loan. This will give you an idea of the true cost of homeownership. He suggests that borrowers budget for rates, building insurance or body corporate fees as well as repairs and maintenance.

“If someone is paying $300 per week on rent now and the mortgage repayments on their proposed new home would be $500 per week, they should add an extra $100 per week for rates and associated expenses. Based on this, they should put $300 per week away in a separate account and not touch it.

“Lenders also look for a proven 'propensity to pay' the proposed loan repayments, so this additional savings record will be a big help towards obtaining a favourable outcome for their loan application,” he says.

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Belinda Punshon

Belinda is a journalist here at Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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