How to figure out how much you can borrow

Show notes

Today, we’re back with another mailbag episode, where Michael is answering your burning questions about purchasing your first home.

In this episode, Michael explains how to determine your borrowing capacity, and shares exactly what lenders consider when determining how much you’re able to loan. He then breaks down the different kinds of loans, including variable, fixed-rate, interest only, and principal and interest loans — as well as the pros and cons of each. Finally, Michael addresses the popular TV claim that you can buy a house without a deposit, and shares how getting on the property ladder can help you land your dream home.

Transcript

Michael Nasser 0:00
The information contained in this podcast is general in nature and is not to be taken as financial or personal advice. It does not consider your objectives, financial situation or needs. You should consider whether this information is suitable for you and your personal circumstances before acting on it.

Michael Nasser 0:17
Hi and welcome to The Home Run – your guide to buying the first home in Australia. On the show, I’ll walk you through the home buying process from every angle. We cover the steps to take, the pitfalls to avoid, and the answers to all your questions you’ve been dying to ask. No matter what stage you’re at, you’ll learn everything you need to know about buying your first home. I’m your host, Michael Nasser, and I’m a mortgage broker at Lendstreet, and I really love helping people buy their first home.

Michael Nasser 0:45
Welcome to another mailbag episode where I tackle your most pressing questions about buying your first home.

Michael Nasser 0:51
You’ve been sending us tons of great questions on our Instagram page, and we love hearing from you. So if you have something you want us to cover on the show, head over to The Home Run Instagram page and drop us a line today.

Michael Nasser 1:03
Today, we’re gonna be talking about how to figure out your borrowing power. What kind of loans are available for first home buyers, and how much deposit you really need to save up? Let’s dive in. Alright.

Michael Nasser 1:17
So today’s first question comes from Jack from Coffs Harbor and he asks, I wanna buy a house, and I don’t know how much I can borrow? How do I find out how much I can borrow?

Michael Nasser 1:27
So when it comes to lenders, they will typically use a range of factors to determine your borrowing capacity. These factors include income expenses, credit, history, employment status, and the type of loan you’re looking for. The first one to start with is the most important one. And that’s income. Income is the biggest lever that we have for borrowing capacity. It determines how much we can borrow, and it’s essentially the key factor here. So because it’s one of the most important factors, we need to ensure that it’s regular, and we can include other things such as bonuses, overtime, rental income and anything that you kind of earn in that particular space.

Michael Nasser 2:06
If you’re self-employed, obviously, that does come into play, and there could be a little bit of a difference there. But I guess the important thing to note is that the level of income that you have is the biggest and most important factor, to begin with.

Michael Nasser 2:16
The second thing is expenses. So obviously, lenders will look to your expenses to see how much leftover income you have after all your bills and expenses are paid for each month. And this will give them an idea as to what kind of loan or what kind of amount you could afford to repay. So, I guess what we’re doing here is looking at the differences between your expenses and your income and that surplus income that’s not being used to service your current expenses, will be the difference that the bank will use to determine well, what can you borrow?

Michael Nasser 2:44
So I guess it goes without saying that the lower the expenses are and the higher the income is, the bigger the borrowing capacity will be. And sometimes you’ll hear brokers say, you know, maybe we need to review some credit card limits and things like that to help us with that borrowing capacity.

Michael Nasser 2:57
The third item that I mentioned earlier was credit history. So your credit history is another important factor that lenders will consider. They will look to your credit score and your credit history to assess your creditworthiness to determine if you’re a high or low risk borrower. So, this is probably something a lot of people don’t consider at the first instance, it would be, what’s your credit score? All lenders, most lenders and the big lenders in particular will always do a credit score as part of the application process. And they’ve got a number in mind as to determine whether you’re risky or not risky. That number is 650. So, if you ever do a credit check and there are a couple of ways you can do a credit check, we’ve done a few episodes on your credit score and the importance of your credit score so, check back and see what episodes they were in that regard. But if your credit score is under 650, it’s not generally a good number, and the banks may decline that at first instance because of a low credit score. So, credit history is something to keep in mind.

Michael Nasser 3:49
Another question I always get in this particular space is, what if I don’t have a credit history? And that can be possible for first home buyers. And how does that develop and effectively to have a credit history, you need to have opened either a mobile phone account or a Telstra account. Also, you know, a Vodafone or something like that.

Michael Nasser 4:05
If you’ve been renting and you’ve got a utilities bill, generally those types of things will trigger a credit report or a credit history.

Michael Nasser 4:11
If you don’t have a credit history, that could also not work in your favour.

Michael Nasser 4:16
So your employment status is another area to be thinking about borrowing capacity and how that will affect it. You want to consider what the bank wants to see in this regard or the lender wants to see is stability, stability and regular income because this gives them the confidence that you’re gonna be able to make your loan repayments. So that’s critical for determining your borrowing capacity.

Michael Nasser 4:33
Again, I’ve mentioned earlier, if you’re self employed, things are a little bit different in that regard. We need a little bit more documentation to prove the stability. Again, what we’re trying to show with lenders when we’re trying to determine your borrowing capacity is consistency and regular income.

Michael Nasser 4:47
If you’re a PAYG, it’s quite simple to determine that if you’re self employed and your income fluctuates, we generally need to get a snapshot of a longer period of time and this will allow the bank to use an average over a longer period, generally two years and in that instance, we can put forward what potential borrowing capacity could be based on income over a longer period of time.

Michael Nasser 5:05
The last thing that comes into play when it comes to borrowing capacity is the type of loan that you’re looking for. So this can impact how much you can borrow. For example, if you’re looking for a fixed rate loan, your borrowing capacity might be lower than if you’re looking for a variable rate loan as the repayments will be higher.

Michael Nasser 5:19
But how does the lender actually work out your borrowing capacity? And the way that they do that is with something called a serviceability calculato,r and every lender has one and the advantage of using a broker is they’re actually able to run through the servicing calculators of not just one but multiple banks to see who will allow you to borrow the most if that’s something that’s obviously of interest to you. So it’s going to account for your income and your expenses, and it’s gonna work out what that income is if it exists and how much we can afford to repay with that surplus income that’s not being currently used.

Michael Nasser 5:50
When I mentioned before that the loan type could have an effect on your borrowing capacity. This comes into play with something called the assessment rate.

Michael Nasser 5:59
Now, the assessment rate is a critical component when it comes to borrowing capacity. It’s a rate higher than the rate that you will end up paying. But it’s the rate that the bank uses or the lenders use to determine how much you can borrow. And for example, the rate is 5% that you’ll end up paying the bank might use an assessment rate of 8%. And it’s basically a buffer.

Michael Nasser 6:18
The final thing that I wanted to mention when it comes to what the banks look at, when they go to determine your borrowing capacity is what they call DTI or it’s otherwise known as your debt-to-income ratio. This is the measure of the total debt compared to your total income. And basically what we do is we put that into a ratio, and there’s a number that comes out at the end of it. The lower your DTI, the more you are able to borrow.In Australia, most lenders use a DTI of around five. This means that if your total debt repayments, including your proposed mortgage should be no more than five times your gross income.

Michael Nasser 6:54
And the reason why I mentioned this concept is because as a rule of thumb, you times your income by five and you might have heard brokers say that or someone have have told you that in the past, but that’s the rationale of where that comes from that DTI concept. So if you’re, for example, earning $80,000 per year, and you wanna figure out basically what you could be looking at, it’s gonna give you a borrowing capacity of around 400,000. Now keep in mind in that scenario, we haven’t included other expenses. This is just using the 80,000 and assuming there are no other expenses. So this is a rough rule of thumb to get you started. However, if you speak to a broker, they’re obviously going to be able to provide you a much more accurate figure. And obviously, these are all the factors that might determine that.

Michael Nasser 7:32
So the second question comes from Adam from Lewisham in Sydney. And his question is I’ve heard of variable and fixed loans, but I also hear people talking about interest only loans and I hear it on the news quite a bit. Can you break down the different types of loans and what they mean. So, I guess there are heaps of particular types of loans.

Michael Nasser 7:51
We’ve mentioned variable and fixed and we probably have heard of those in some capacity and probably know to some extent what they are.And you also mention interest only loans and that focuses on the loan from a different perspective. But let’s start with the variable, the variable rate loans.

Michael Nasser 8:05
So a variable rate loan, the interest rate can go up or down depending on the market conditions. And this can affect your repayments. This type of loan gives you flexibility and it may be suitable if you think the interest rates will remain low or if you want to take advantage of any rate drops. However, it also means that the repayments may increase if the rate rises. So, so basically it’s a flexible loan.

Michael Nasser 8:27
So if we go into the pros of what a variable rate loan can do, they typically come with more flexibility and repayment options, including the ability to make extra repayments without penalty and redraw the funds if needed. Another pro other than flexibility that we have with the variable rate is the potential for savings. So if the rate drops, your repayments will also decrease, which means you could potentially save some money.

Michael Nasser 8:50
Now, currently, as we stand in the market, it’s not something we’re really used to because we’ve been so used to the rates increasing for the last little while. However, when they do drop, if you’re on a variable rate, your repayments will also decrease, which means you can potentially save money on your loan over time. And there is the the other potential for savings, if you do make those extra repayments, which are available on a variable rate product, it enables you to make additional repayments. And that in turn helps you save money too by lowering the amount of interest you’re gonna repay over the course of the loan. So that flexibility also allows you to save. Lower fees, variable rate loans come with lower fees compared to fixed rate loans. So it can be slightly more affordable for borrowers. And that’s something to keep in mind as well.

Michael Nasser 9:34
The last pro that I’m gonna talk about would be the opportunity to switch. So with a variable rate loan, you have the option to switch whether that’s to another lender with a lower rate or to a fixed rate loan, you’re not locked in at all. And you have the ability then to maneuver the loan as you see, fit at any point in time again, whether that’s a refinance to another lender that’s offering a more attractive rate or fixing it if that’s what you decide to do. So you do have that ability to switch. With any positive, there’s also some negatives, and I guess a few of the negatives that come along with a variable loan that we need to keep in mind is uncertainty. That’s probably the biggest of the main drawbacks of a variable loan is there is uncertainty in your repayments so they can increase or decrease depending on market conditions. It obviously works as a positive if the rates are going down. But I guess on the flip side, if the rates do start going up, which they have been of late, then you’re also going to be paying more. And that’s something that we’re gonna start to feel more with what’s known as the fixed rate cliff drop, which is coming up soon where a lot of people are fixed on 2% during COVID and now a lot of those people that fix for 2 to 3 years are now starting to roll off this year and their rates are going to be jumping from 2% to 5.5% or thereabouts.

Michael Nasser 10:44
So the variable rate loan does create that uncertainty if interest rates rise, your repayments will also increase, which means you might end up paying more over the life of the loan so variable rate loans can make it difficult to budget for your repayments. You can’t be sure of what the repayments are going to be in the future. And because of that, it becomes a little bit harder to plan things and this may lead to potential stress.

Michael Nasser 11:05
Obviously, when we do our calculations, we do make sure that you’re not put into a situation that’s not favorable for yourself and that it is affordable.

Michael Nasser 11:13
So with big rate loans, as I guess it’s, it’s indicated they’re fixed. So the interest rate is locked in for a set period of time, they’re generally locked in between a period of 1 to 5 years. Your repayments will stay the same during that time. This type of loan provides certainty and allows you to budget for your repayments. However, you won’t benefit from any rate drop during the fixed rate period and you may face break fees if you want to switch loans.

Michael Nasser 11:36
It’s also important to note that that period is between 1 to 5 years and the fixed rate loan can vary based on what length you would like to fix it for. So typically for fixing it between 1 to 2 years, it’s a lower rate. If you’re fixing it for five years, the rate will generally be higher.

Michael Nasser 11:52
So what are the pros of a fixed rate loan and why would you take one? The biggest one by far and away is certainty. The fixed rate loan makes it easier to budget for your repayments as you know exactly how much you need to pay each month. So if the interest rate does rise, your repayments won’t increase. And this provides protection against any interest rate hikes. And that’s probably something that a lot of people that have fixed rate loans are currently feeling if they’ve fixed it in the last sort of 2 to 3 years. The downsides to a fixed rate loan is lack of flexibility. So fixed rate loans typically come with fewer flexible repayment options compared to variable rate loans and they come with restrictions on extra repayments and redraws. That flexibility also comes into play when it comes to refinancing because you will be subject to the second con or the second negative which is break fees.

Michael Nasser 12:40
If you decide to break the fixed rate term early, you may be subject to break fees, which can be significant. The logic would be the earlier in the fixed rate period that you decide to break it. So if you’re, you know, got a five year rate or five year fixed rate and you wanna break it a new one, you are invariably going to have a higher fee than if you’re six months out from the rate fixed rate period ending. So that’s something to keep in mind.

Michael Nasser 13:00
So another negative of fixed rates is the fixed rate loans often come with higher fees and charges compared to variable rate loans, which can make more expensive and the last one is missed savings. So if the interest rate does drop your repayments won’t decrease, which means you might miss out on potential savings on your loan. So I do see a lot of first home buyers that do decide to take that avenue for the first two years and then after the two years, they’ve adjusted to the loan, they’re used to the repayment amounts and then they’ve generally built up a bit of equity in the property. And then we look to a variable rate and there are some benefits there as well.

Michael Nasser 13:33
Other aspect of the question that was asked was the difference between interest only loans and principal interest loans.

Michael Nasser 13:39
So regarding interest only loans, well, this is the type of loan where you’re paying interest for the loan for a set period. Again, it’s similar to the fixed, it’s for a period between 1-5 years. And what you’re doing here is you’re not paying off any of the principal. This type of loan is suitable if you’re an investor and you’re looking to maximize tax deductions or if you’re expecting your income to increase in the future. However, it’s important to note that interest only loans can be expensive in the long run as you are paying more interest over the life of the loan.

Michael Nasser 14:06
The principal is the actual loan amount that you take or say the purchase price and the interest is going to be the interest that the bank is charging you. This can result in a monthly repayment compared to a principal interest loan. Cash flow management. So interest only loans can be useful for borrowers who want to manage their cash flow or who are experiencing temporary financial hardship. Flexibility. So interest only loans often come with more flexible repayment options including the ability to make extra repayments without penalty and redraw funds if needed.

Michael Nasser 14:35
So the downsides of an interest only loan, so higher long-term costs. Since you’re not paying the principal on the loan during the interest only period, you’ll actually end up paying more in interest over the life of the loan compared to a principal and interest loan. Again, the interest period, interest only period can range between one and five years. So you can’t have it indefinitely. It needs to be for that period. So if you’re doing interest only for say, five years, what will happen is in year six, you’re gonna go to a P& I arrangement. And then what’s gonna happen is you’re paying the principal off over a 25 year period compared to a 30 year period.

Michael Nasser 15:08
Another downside is equity growth. So if you’re not paying off any principal of the loan, the equity in your property won’t grow during the interest only period. So it’s not to say that it won’t grow at all because over a period of time, generally your property increases in value. There is a refinancing risk if you’re unable to refinance or sell your property at the end of the interest only period, you may be forced to start making principal repayments, principal and interest repayments, which is obviously gonna be a higher amount and may put you in financial strain and qualification difficulty. So lenders have tightened up recently, their lending criteria for interest only loans. So it can be more difficult to qualify for these types of loans.

Michael Nasser 15:45
It’s not common that a first home buyer on an owner or occupy a property, that’s a property that you’re gonna live in will be eligible for an interest only loan. Interest only loans are specifically designed for investment properties only.Unless obviously you decide to purchase your first property as an investment property, then it may come into play. And I guess on the flip side of that, we’ve got P&I loans which are also known as principal interest loans.

Michael Nasser 16:08
So these types of home loans are where your repayment goes towards both the interest charged on your loan and the principal amount that you borrowed. So in this instance that $500,000 will also be coming down over time and you’ll start to see that reducing as well as paying your interest component. Each repayment helps reduce the overall amount of debt you owe on your home loan. Over time, the repayments are calculated based on the loan amount, the interest rate and the loan term and are spread out evenly over the life of the loan.

Michael Nasser 16:38
I guess the most important thing is that over time, the equity in your home in this instance will grow because you’re paying both the interest and the principal and this will allow you to build up equity and gives you more flexibility if you need to refinance or you want to purchase another property a little bit later on.

Michael Nasser 16:54
So the third question comes from Brooke in Balmain.

Michael Nasser 16:57
She’s actually got two questions. An ad on TV said that I didn’t need any deposit to buy a house. Surely it’s not that easy.

Michael Nasser 17:03
How much deposit do I really need? And can you also explain what L M I is as simply as you possibly can?

Michael Nasser 17:10
So, deposits probably the biggest barrier I find for first home buyers is the deposit component of a home loan, especially if you’re buying in a capital city. Whether that’s Sydney Melbourne, Brisbane, etcetera, there are some loan options available to you so you can buy a house with no deposit and we’ll get into those. It’s important to understand that these options may not be suitable for everyone and there are other costs involved when you do buy a home. So it’s not suitable for everyone and it may not be available to everyone either as well.

Michael Nasser 17:36
Well, so in general, most lenders in Australia will require you to have a deposit of at least 5% of the purchase price of the property that you’re looking to buy. However, you can save a large. If you can save a larger deposit of 20% or more, you will be able to access more favorable loan terms and interest rates.

Michael Nasser 17:52
If you have less than a 20% deposit, you may be required to pay lenders mortgage insurance and this can be a significant expense. You’ll also need to factor in other costs associated with buying a home such as stamp duty, conveyancing fees, and building and pest inspections.

Michael Nasser 18:06
So it’s important to note that when we speak of a deposit, a deposit just generally goes towards the purchase price, but there are other costs associated that we’ve got to factor in and a good mortgage broker will go through those additional costs. So they, it’s important to keep those in mind.

Michael Nasser 18:20
Saving for a deposit can take time so it’s important to start as early as you possibly can and be as disciplined with your savings as you can be.

Michael Nasser 18:27
It’s important to note that there are government schemes that are available to help first time buyers get into the property market and we’ll touch on a few of them here.

Michael Nasser 18:33
So we’ve got the First Home Loan Deposit Scheme. This is a, a grant. It’s a federal grant that enables you to a first home buyer to purchase their home with a 5% deposit and not pay LMI.

Michael Nasser 18:44
Another option that we’ve got is the First Home Owners Grant and this is generally depends on state to state a $10,000 bonus or grant that’s allowed if you’re purchasing or buying a new home.

Michael Nasser 18:54
And the last I guess incentive that’s designed towards assisting with the deposit is known as the First Home Super Saver Scheme. This works by allowing you to make contributions, additional contributions into your super fund to save for your first home. You can then apply to release these voluntary contributions along with any associated earnings to help you purchase your first home.

Michael Nasser 19:14
We’ve got more information on this particular scheme in episode 25, Paul Benson. So I do recommend you check that out. If you’re looking to make use of that particular scheme.

Michael Nasser 19:23
It’s important to note though, with these particular schemes and incentives, they all have eligibility criteria. So it’s important to get advice from a mortgage broker or from a legal professional as to whether one or more can apply in your situation. When it comes to no deposit. Is it possible to buy a property with no deposit?

Michael Nasser 19:39
And the answer is yes, you can purchase a property in Australia with no deposit.

Michael Nasser 19:45
It’s a product called a guarantor loan and a guarantor loan is a type of loan that allows the borrower to purchase a property with the help of a guarantor. enerally a parent who provides additional security for the loan. As mentioned, the guarantor is generally a family member who agrees to use their own assets such as their home or their savings as collateral for the loan. So the lender can potentially can seize or sell any of the security if the borrower defaults on the loan in order to recover the money that’s lent. So this is a really important concept to understand because there is a little bit of risk with this particular type of product. And there’s generally legal advice that needs to be provided if we’re looking at a loan at this particular loan.

Michael Nasser 20:24
But the benefit of a guarantor loan is that it can help a borrower secure a loan with a smaller or no deposit at all as the guarantors asset. So the parents assets provide additional security to the lender. So it effectively minimizes the risk from the lender’s perspective. And the costs generally, as we mentioned are stamp duty, legal fees, little other bits and pieces.

Michael Nasser 20:44
So what we can actually do with a guarantor loan if they are available to you is we can borrow up to generally between 105% and 110% of the purchase price. So this allows you to borrow for your stamp duty and your conveyancing. So it’s, it’s, it is pretty powerful. We’ve got to have the equity available in the guarantors property and there might be some restrictions on the guarantor depending on the lender as to whether they need to be earning income or not. So there are a few things that can come come into play, but it’s a very powerful device and it’s a very powerful loan. And if you are able to use it, it will definitely be something that allows you to get into the market a lot sooner. The only caveat I’d put with a guarantor loan is that you need to be able to borrow the full purchase price and the additional cost.

Michael Nasser 21:26
So the final part of Brook’s question was in regards to LMI. So LMI is also known as Lenders Mortgage Insurance. And it’s basically a type of insurance that’s designed to protect the lender when you take out a home loan if you have a deposit of less than 20% of the property’s value.

Michael Nasser 21:42
So it’s an insurance premium like an insurance premium, it’s there to protect in the event of something going wrong. And in this instance, the event that it’s protecting is the event of you defaulting on your home loan. And it’s an insurance policy that you as the borrower take out, but you take it out on behalf of the bank. So it doesn’t insure you, it insures the bank.

Michael Nasser 22:03
And the reason why this happens is because when you take a loan of less than 20% the lender is taking a greater risk because they’re loaning you a larger component of money in relation to the value or relative to the value of the property.

Michael Nasser 22:19
So a lot of people view LMI as a negative thing, but generally I view it as an opportunity cost provided, you can afford it. It will allow you to transact with a smaller deposit, which allows you to get into the property market a little bit sooner. And it allows you then to potentially realize some, some equity if you are able to get in sooner than you would if you had to save the full 20%.

Michael Nasser 22:39
The last question comes from Rachel, from Brunswick, which is in Melbourne.

Michael Nasser 22:43
My mum and dad’s home is really nice, but the ones that I’m looking at aren’t as nice and it makes me sad.

Michael Nasser 22:49
What advice do you have for me?

Michael Nasser 22:50
I guess it’s understandable to feel discouraged if the homes you’re looking at aren’t living up to your expectations. Especially if you’re comparing them to your parents’ home. It’s important to note though that everyone’s circumstances and priorities are different. So there’s definitely no one size that fits all. So, so the important thing here is to stay positive is to focus on your budget.

Michael Nasser 23:08
So it’s easy to get swept up in features and amenities of a home. But it’s important to remember that the most important factor is whether or not you can afford it. So make sure you have a clear understanding of your budget and what you can realistically afford before you start looking at properties. And I think that’s one of the biggest ways to to counteract this, understand what your borrowing capacity is. And if you understand what that is before you start looking, it’ll help manage your expectations.

Michael Nasser 23:31
So just because a home isn’t per isn’t, isn’t in perfect condition, doesn’t mean it’s not worth considering, look beyond the surface level floors and try to imagine the the potential of the property with a bit of creativity and some renovations, perhaps you can turn it into something that is more like your dream home. So be prepared to compromise from the outset. Generally, what people do in this instance is they’re gonna have a list of nice to haves and they’re gonna have a list of must haves. So make a list of what they are and be sure that you prioritize them. I guess there’s a bit of strategy in here and it helps manage your expectations, but be open to that idea of compromising on some of the less important items.

Michael Nasser 24:04
And the last thing when it comes to trying to stay positive in this particular scenario is trust your instincts at the end of the day, you should feel happy and excited about the home that you’re buying.

Michael Nasser 24:14
So if you’re feeling sad or disappointed or you’re upset about it or with the properties that you’re seeing, it might be a sign that you need to adjust your expectations or you might need to consider a different approach.

Michael Nasser 24:23
What you don’t want to do is be stuck with the, the biggest purchase of your life at that stage and not be totally happy with it.

Michael Nasser 24:29
If it’s not part of your expectations or you can’t fit it into your expectations, meaning the long-term approach and that leads, it’s a good segue, I guess, into the concept of getting your foot in the door and the property ladder concept, I guess the best way to explain. This is with a scenario with a client that I’ve been working with over a long period of time. I was working with a client. She was a, a uni graduate.

Michael Nasser 24:50
So she just finished uni and started her first job and one of her goals obviously was to buy her own home. And that was something she was pretty adamant about. So we started doing all the, the research and all the servicing. So at that point, we basically evaluated the situation. We took a step back and we worked out our priorities.

Michael Nasser 25:06
So at the time, we were looking at the properties within her budget and we’ve ended up finding a nice two bedroom unit. She liked it. It wasn’t as spacious or luxurious probably as she initially thought, but it was in a in the right location. So it was close to where her work was. So it sort of ticked off that box in terms of location, the property itself wasn’t what she ideally wanted, but it worked. And most importantly, it fit in her budget that we had sort of mapped out.

Michael Nasser 25:28
So we ended up buying, well, she ended up buying the property, took out the home loan, which obviously was manageable because we’d done all the due diligence to make sure that we weren’t putting her into a situation that would put her in financial stress and was making the repayments.

Michael Nasser 25:40
So, over the next few years she’s been paying down the mortgage and the mortgage has been getting less and less. It was a principal interest loan. So we were building equity both ways, both from the loan reducing and the property price increasing. And only last month she got back in touch with me and it’s been three years now and she’s like, I’m thinking of upgrading to a larger place and I think it might be that time. Can we readdress and re look at the situation since then, she’s received a few promotions, she’s got received some pay increases. So her income is slightly better. This is gonna allow for a higher borrowing capacity when it comes to the loan.

Michael Nasser 26:09
But on the flip side, the other part is the deposit component or the savings. We recognize that the equity or the value of the property has increased significantly in the last three years. And with the increase in this value, she’s gonna be able to sell her current property and use these proceeds as a deposit for her next property so we can step up. And this is the concept of the ladder where you’re taking a step each time.
It’s that end goal. But again, you’ve got to have the end in mind in this instance.

Michael Nasser 26:33
And as time goes on, you leverage the growth of the value in the asset along with your improved financial situation, which generally comes into play later on in life and you can buy something bigger and more in line with what you’re after.

Michael Nasser 26:44
This is generally accelerated if you find a partner or if you end up meeting the person that you decide to spend the rest of your life with or whatever that may be because then we’re using two incomes as well. And so that also can help in that particular scenario. Not again the case in this instance, but when you combine two incomes, that will help your borrowing capacity as well. But the main thing is that you start and you start in a way that gets you going.

Michael Nasser 27:05
What I would mention here and I’m not gonna go too deep into it is asset selection.

Michael Nasser 27:09
So what’s critical here is that you’re buying the right type of asset, you don’t want to be in a situation where you buy something and then in five years time or three years time you do a valuation on it and it’s still the same price as what it was. And there are some key elements there that come down asset selection and picking the right property. We’ve got more details in Episode 23 with Jared Mccabe. So definitely check that out. But I hope that answers your question and I hope that answers everyone’s question.

Michael Nasser 27:31
I hope you guys got some value out of that, feel free to, to email us more questions.

Michael Nasser 27:35
You can email them at michael@thehomerun.com.au or just post them to me on Instagram, which is how I generally get them. And that way, I’m more than happy to answer your questions going forward. Thanks for your time guys.

Michael Nasser 27:48
You’ve been listening to the home, run your guide for buying your first home in Australia.

Michael Nasser 27:52
This podcast was produced by Lendstreet. Lendstreet is a mortgage broker and home loan specialist that helps first home buyers find the right loan to meet their needs.

Michael Nasser 28:00
We know applying for a loan can be overwhelming and complex. So we help guide and support first home buyers through the process from start to finish to find out more. Head to our website lendstreet.com.au.

Michael Nasser 28:11
We’ve also put a link in the show notes to make sure you don’t miss an episode of the home run.

Michael Nasser 28:16
Be sure to subscribe to or follow the show in your podcast app. And while you’re there, please leave us a five star review. It really helps others find the show.

Michael Nasser 28:26
I’m Michael Nasser, and we’ll be back next episode covering another step on the journey to owning your first home.