When buying a home, many people first ask: “How much can I borrow?” Your borrowing capacity is the amount you can borrow. Lenders look at your income, credit score and existing debts and then arrive at a figure typically expressed as a percentage of the property’s value.
But borrowing capacity is only half the picture. The other big factor lenders consider is serviceability, which is how much you can pay back each month. Serviceability takes a closer look at your day-to-day situation, examining both your income and expenses, the interest rate on the loan, and additional costs such as mortgage insurance.
As a borrower, serviceability should be your number one concern. There could be severe consequences if you can’t service a loan now and into the future.
And if you fail to make a mortgage payment, here’s what can happen:
- Foreclosure risk
Fall behind on your mortgage payments, and the lender may commence foreclosure proceedings. Foreclosure enables the lender to take possession of your home. Consequently, you lose your equity, investment, and the roof over your head. There can also be long-term consequences, as the foreclosure can impact your credit rating and ability to obtain a future loan. - Extra fees and penalties
If you miss a mortgage payment, you could be hit with additional fees and penalties, effectively increasing the overall cost of your loan. - Damaged credit score
Missing or falling behind on mortgage payments can damage your credit score. With a negatively impacted credit score, you may find it hard to get a loan in the future or have to pay a higher interest rate. - Emotional distress
Life is stressful enough already, so being unable to service your home loan could take a significant emotional toll on you and your family.
The best way to avoid any of the above scenarios is to ensure you are upfront and realistic about your income and spending when applying for a loan. For instance, be sure to think about your current income and what it could be in the future. Consider how much you spend each month and whether you need to change your lifestyle to afford your mortgage payments comfortably.
Most importantly, change the question in your head from “How much can I borrow?” to “How much can I afford to pay back?”
The ability to service your home loan is essential to maintaining financial stability and ensuring a secure and stable future for you and your family.
Talk with us today about how the Bravo process can help get you into your new home sooner.