**Reply:** 2

**From:** Michael G

Hi SC,

I'm sure are local broker Rolf will be able to explain better, but...

e.g.

Income earner on $50k per annum.

Roughly 33% of the gross income is factored for debt repayments (in this case a mortgage).

So 33% of $50k = $16,667

Now if we assume the current interest rate is 7% and the interest rate is Interest Only, then this $16.5k will determine how much you can borrow.

i.e. $16,667 divided by 7% (0.07) = $238,095

So does this mean our friend can borrow $238k?, well not really, since the lenders like to play it safe, so they will in fact determine his serviceability by a higher interest rate (to play it safe), say 1-2% higher.

i.e. $16,667 divided by 8.5% (0.085) = $196,078

Now this figure of $197k, represents TOTAL borrowing capacity, so this includes ALL debt, such as credit cards.

So if our friend has a $10k limit on a few cards, then this will reduce his capacity by $10k, e.g. down to $187k.

Why?, because lenders think that credit cards are instant credit, and our friend here could instantly rack up $10k of debt, which would affect his debt ratio rather quickly.

The only time credit cards dont come into the picture, is when you have it set so the entire balance is paid off at the end of the month, then these figures dont come into calculations.

Getting back to the story, we are left with $187k right?, well this is how much he can borrow. To determine how much he can buy, you just need to work out what LVR (loan to value ratio) you will be using.

If we assume the normal 90%LVR loan, then the $187k represents the 90%, to determine the total value just divide by 0.9

e.g. $187k divided by 0.9 = $206,753

So our friend here can borrow $187k, to buy a $206k property, but only if he has enough cash or equity to over the $18k deposit and $12k of purchase costs (stamp duty, legals, mortgage insurance etc).

Hope that helps...

Michael