Wanting to own

Question from Paul updated on 27th April 2012:

I am on a low income and am wondering if it's possible to get a mortgage to buy my own place? I am currently paying $350 a week in rent. After doing my sums on the bank's website it shows that by paying this amount in rent, I could potentially borrow about $220,000 with a deposit of $15,000 to $20,000. However, when I checked to see how much I could borrow against my business income of $32,000 (with taxable income of around $24,000) and family support income of $11,000 per year, it's only $100,000. Why is it that a bank's website says I can afford to pay a loan of around $220,000 but the bank won't lend it? Is a person buying a house at the bottom of the housing market (even though they can afford the payments) not considered a good risk?

Our expert Kris Pedersen responded:

There can be quite a difference between the calculators shown on banking websites and how they actually assess affordability. Note that a calculator which only asks how much you are paying in rent is really just there as a sales tool for the banks to attract potential customers. This is because it hasn't asked you at all what your monthly outgoings are. The banks do need to show an element of care and that through their figures a client could afford the mortgage that they are giving to them. Note that there are several buffers that the banks include in their own calculations to ensure that they are building in safety margins. Also you have stated that you are self-employed and there can be differences in the way that you look at your income and the way the bank calculates it (you may look at the $32,000 figure whereas it is likely the bank will only go off the $24,000 number). Obviously this is frustrating for you especially when you feel you can afford the payments. I would recommend calculating them based off a principal and interest mortgage, over a 30 year term based on a 7.5% interest rate. This comes to $1,538 per month for the $220,000 mortgage you mentioned. As you are receiving family support I am picking you have either a single or multiple dependants. After the mortgage payment this would leave you about $1,020 to pay rates, insurance and all living costs which is quite tight. If you do feel you can still afford this and have a family member / friend (who earns a reasonable income) who you trust and who trusts you, you may wish to approach them to see if they would come on the mortgage to assist with meeting the serviceability requirements.

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.krispedersen.co.nz

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