How much can you borrow?
The following is a general broad picture about serviceability of a loan.
Individual lenders may be different but we look for fundamental principles.
Banks have different criteria but are controlled by APRA ( session 17 ) who determines how much of a margin banks should apply above the interest rate determined by the Reserve bank rate.
Interest charged by the banks in general is 2% above the Reserve Bank interest rate
And the banks advised by APRA apply another 2.5% to determine whether the Bank’s clients can service a loan and APRA further advises that serviceability should be assesses on P&I rather than on Interest only which adds another 1.25%
Therefore:
Interest Reserve Bank rate 4.25 %
Bank Interest rate 6.25%
Serviceability 8.75% +1.25%=10%
The banks will take into account 30% of gross income as serviceability, so a couple on $100,000 of combined income can borrow $300.000 ($30,000/.10)
This is 3 x combined salary.
There is another rule of fist that you can borrow 5 x of combined income but this is probably a bit optimistic but can be achieved if you are a public servant or pilot and can find a good finance broker.
This pales into insignificance compared to the way banks treat income from rental properties. They will take into account 80% of rental income as serviceability ( and if they don’t, find another bank that will)
This will lead to a fundamental conclusion:
The only way to make money in property investments is to borrow money. and the more money you borrow the more profitable you will be.
$ 1 of rental income will allow you to borrow $8
$ 1 of extra salary will allow you to borrow $3
ONE DOLLAR OF RENTAL INCOME IS WORTH $2.67 OF SALARY
So probably people should consider investing in property rather than trying to increase salary by doing overtime or protest in the streets to increase salaries.