The question, what does your income need to be to get a mortgage has no straight forward answer. There are many factors that come into play.
The income you will need to earn to get a mortgage will depend on:
- The size of the loan
- The number of Occupants that will live in the property
- The impact of other finance or debt commitments
- Current lending criteria & Interest Rates
The Size of the Loan – The bigger the loan, the more income will be required.
There are a range of calculations that lenders use to test what your income needs to be to get a mortgage.
There are a range of calculations that lenders use to test what your income needs to be to get a mortgage.
It may be a surplus income calculation where your net income, less your living, household costs and the mortgage repayments (calculated using a stress test interest rate that is approx. 2% higher than advertised interest rates) will determine how much you can borrow.
It may also be a debt servicing ratio (DSR) calculation where approx. 33% of income is committed to paying tax, 33% is used for all living and household costs which leaves 33% of income available for servicing debt (including the mortgage and any other debts or access to credit you may have). If your percentage of debt is too high, this will impact your ability to have a comfortable lifestyle.
Some lenders also use a debt-to-income ratio calculation which sits around 5-6 times your income. The debt-to-income (DTI) ratio is simply the amount borrowed (plus other credit facilities) divided by the borrower’s gross income. It is used by lenders to determine your borrowing risk.
As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money, and the combination of the rent and the savings are equal to the mortgage repayments, plus the house insurance and counsel rates, then there is a good chance you will meet the banks’ income criteria.
The number of Occupants that will live in the property – Lenders take into account the cost of living for each occupant i.e. single, couple, family.
Bank statements are analysed to see how much potential borrowers spend on essential living costs, discretionary living costs and future household costs once living in a property.
The overall costs of the occupants will help determine what your income needs to be to get a mortgage.
The Impact of other finance or debt commitments you may have – Lenders will take into account how much existing credit you have (car loans, personal loans, student loans, credit cards, pay day loans) and include these in the debt servicing calculations.
The actual monthly repayment or a percentage of the credit limit is used in these calculations and will negatively impact how much you can borrow.
The higher existing credit facilities the more income you will need to get a mortgage.
The type of property – If you are purchasing an owner-occupied property, you may have the choice of having a boarder or flatmate (if you have extra rooms) which will add to your income and assist you to borrow more.
Perhaps you are purchasing a rental property where your income will be subsidised by tenants paying rent.
Current lending criteria & Interest Rates – Depending on real or perceived risks, new criteria for lending can be imposed by lenders, the reserve bank and/or the Gov’t.
The new criteria can have a real impact on how much income you need to get a mortgage.
The new criteria maybe in the form of:
The new criteria maybe in the form of:
- loan to value ratio (LVR) restrictions,
- debt-to-income restrictions,
- higher deposit requirements (20% for owner occupied & 40% for rental investments),
- discounted incomes from rentals,
- taking into account all living costs for debt servicing calculations
The economy and substantial shocks (such as Covid) will also impact interest rates i.e. a falling economy will see interest rates falling, however a lifting economy with inflationary pressure will see interest rates rising.
Rising interest rates will impact how much you can borrow and how much income you need to get a mortgage.
As you can see above, the answer to the question, what does your income need to be to get a mortgage is complex with many variables. An experienced mortgage broker can help you calculate this and provide the answer for you.