How much can I borrow?

You've probably got a rough idea of the sort of home you'd like, and how much you'll have to borrow to buy it. But will a lender actually lend you this amount? That depends chiefly on two things:

• What you can afford to repay from your income
• How much a lender will lend on a property

What you can afford to repay

Lenders want to be sure that you’ll be able to keep up with your repayments and still have enough disposable income left to live on. They don’t all work this out the same way.

Some say that your fixed payments (the mortgage repayments plus any other loan or hire purchase payments) should be no more than 30, or 40 percent of your gross income.

Knowing what your income is and what your existing fixed payments are, you can work backwards to find the level of mortgage repayment a lender will allow. Then, you could experiment with the repayment options calculator to see what size loan you could afford with these repayments.

Other lenders calculate a minimum surplus which you should have left over each month after fixed payments and a living allowance are counted.

If you're a couple, the calculations are based on your combined income. If you have children, lenders will expect you to have less disposable income left over than people without children.

If you're borrowing a high proportion of the purchase price, lenders will expect you to have more spare income so you can better deal with any future uncertainties like a rise in interest rates or the lowering of your income.

If you plan to have flatmates in your new home to help pay the bills, some lenders will include 70 or 80 percent of their rent in your income; other lenders won't include any.

The easiest way to find out what a lender will give you is to give them your income and spending details and ask them to make the calculation. Alternatively, you could ask a mortgage broker to do this for you.

How much a lender will lend on a property

Generally you can expect a lender to give you up to 80 percent of the value of a house. You will often find lower percentages loaned on properties outside urban areas, and on apartments. These figures are sometimes called the “loan to value” ratio, or “LVR”.

You can face two additional costs if you want to borrow a high proportion of a property’s value:

• Most lenders will charge you a "low equity premium" or "mortgage indemnity insurance" if you borrow over 80 percent. This protects them from the risk that you might not keep up repayments. It is a lump sum which you can pay in cash or add to the amount you borrow.
• Lenders may also ask you to get a valuation on the property. If there is a difference between the purchase price and the valuation, lenders usually work out how much they'll lend on the lower figure.

Most lenders want you to have a cash deposit to put towards your home. You'll be more committed to keeping up payments on the loan if you have some of your own money in the property right from the start.

Whether the cash is money you've saved or is a gift from another member of your family doesn't matter to most lenders. But some won't accept deposits raised through loans such as credit card cash advances, since this will raise your financial commitments and make it tougher for you to meet all your payments.

To get a good idea of the lending limits for the types of property you want to buy and the area you want to buy in, you'll need to talk to one or two lenders, or a mortgage broker, in your area.

Government assistance

If you can afford mortgage repayments but don't have a deposit, you may be eligible for a Welcome Home Loan. With this scheme you can borrow up to $200,000 with no deposit, and up to $280,000 (now up to $350,000 in some areas) with a small deposit, to buy a home. Lending criteria are different to standard loans. The scheme structure is particularly well-suited to extended families.

If you join KiwiSaver you may become eligible, after three years of membership, for a first home deposit subsidy. The subsidy will be $1000 for each year of membership after 2007, to a maximum of $5000. A couple both in the scheme could therefore get up to $10,000. The subsidies become payable from July 2010.

Your credit record

If you've been chased by debt collectors for things like unpaid hire purchase payments or an unpaid power bill, you'll probably have a bad credit record. This means that lenders may want to lend you a lower proportion of the property price, or may turn you down altogether. If you can't get a loan from standard lenders, you may have better success if you approach a low doc lender who specialises in higher-risk loans.