The next ‘C’ is Capacity. This is a test that the lenders conduct to satisfy themselves that the borrower can repay the loan that is being applied for based on the client’s particular circumstances. It is sometimes referred to as Serviceability too.
A bank will view the numbers quite differently to your own calculations, which is why you may sometimes experience a variance in what the bank will approve you for, and what you believe is affordable based on your own budget.
The main difference which comes into play is how the banks calculate the proposed new debt (and/or existing debt) that you are looking at taking out, especially in current times where rates are so low. What banks tend to do is use a 10-year average of rates (usually around 7-8% in most bank calculators) as a ‘Qualifying Rate’ to on a P&I basis to come up with ‘proposed’ repayment amounts.
While in reality you are for example in the current market likely to fix in the 4%’s or 5%’s, the bank has to take a long-term view on the mortgage with the fact that mortgage rates fluctuate, and that they must be seen to be responsible lenders, rather than putting clients who cannot afford lending under financial distress.
The balance of what’s known as “Uncommitted Income” is then calculated by taking the total monthly NET income and deducting living expenses along with any other ongoing obligations/liabilities. It is important to understand here that there is also a bank calculated minimum for a particular family set-up (for example, single households, joint, and households with dependents), and these can vary between lenders too. Provided there is a reasonable surplus after taking the above into account then they may be happy to approve a loan if other criteria is met.
Different forms of income are calculated differently between banks and just because one bank won’t give you what you need, it doesn’t necessarily mean another won’t.
It’s worth checking with an expert who understands all different banks servicing criteria, to see if there may be a more suitable lender for you. Contact me today for a chat.
Read all about the other C's in this 5 part series:
Part 1 - Character
Part 2 - Capacity
Part 3 - Capital
Part 4 - Collateral
Part 5 - Conditions