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How lenders work out whether you can afford a loan?

Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea.

Being able to secure your ideal loan amount can seem like a battle of balances. Once you have worked out your budget and finance through a spreadsheet, there is still one issue left to deal with, that is lenders assessment rates. It is also known as an interest rate buffer.

Getting your loan while interest rates are low doesn’t change the fact the lenders are compelled to ensure that you will able to make repayments if interest rates fluctuate.

Matching the features of a loan to your financial positions is critical and often require a third-party expert to help guide you though. What is also very important is that people understand the ramifications of exposing themselves to debt. When modelling costs, an adviser would be wise to be very conservative in the figure they are using to make sure that you are still able to afford the loan.

Assessment rates add a margin of a buffer to the variable or fixed interest rate of your loan. The assessment rates protect that you will able still repay your loan when the interest rate rise because they are sure to rise and fall throughout the life of your loan term.

“APRA" is clamping down on lenders exposing people to too much debt and not preparing them for the interest rates as well as they could have.

The assessment rate can be anything from 1.5 – 2.5% above the variable rate, depending on the lender, and many are currently using rate of approximately 7.0 – 8.5%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation with varying amounts of loan.

In some cases, the difference lenders may offer different loan amounts, it can be tens of thousands of dollars different, so the biggest loan isn’t always the better. Ensuring that you can pay your mortgage, whether the rate is rise or stay low, requires a bit of know-how. Speak to Kevin Poh on 0415820016 to find out more.

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