How to charm money-lenders

By MARY HOLM

Q: In a recent column, you said: "At your current savings level of $1000 a month, you could get a 10-year, 7 per cent mortgage of $86,000 ... "

I hear banks use two factors (cash flow and equity) to determine how much we can borrow.

Can you explain in more detail the actual formula used to determine how much we can borrow?

Or can you tell me where I can get this information on the internet? This will be very useful in my property investment.

With the property market heating up, you're probably not the only one thinking along these lines.

In the sentence you quoted, I was simply looking at some numbers, using an internet calculator (more on that in a minute).

But your letter points out something I should have said at the time: mortgage lenders don't look only at numbers, but at the circumstances of the borrower.

Mortgage Bankers' Association head Rob Tucker, of Loan Plan, says three factors are considered in a residential property loan:

* Your ability to service the loan - what you call cash flow.

Lenders tend to use two "rules" here. One is that you can spend up to 30 or 35 per cent of your gross income on mortgage payments.

The other is that you should have a certain "net surplus" each month after paying all your fixed commitments, including mortgage payments.

For example, says Tucker, if you were a couple borrowing $150,000, the lender might say you should have a surplus of $1500 a month, plus $120 for each dependent child.

"The higher your income, the greater the net surplus required," he says. "They must think the more you earn, the more you spend."

* Your security or equity in the property. In other words, the size of your deposit.

These days, loans of up to 95 per cent of the purchase price are reasonably common, "provided the other 5 per cent is your own saved money", as opposed to an inheritance, lottery win and so on, says Tucker.

"That suggests you're prepared to put your hard earnings into it."

* Your personal stability. Issues such as how often you've changed jobs or moved house are relevant here.

"The third factor really matters only if it's a tight deal and the other criteria have been pushed," says Tucker. He adds that lenders all use different formulas and guidelines. "One bank may say no, another may say yes."

For help with crunching numbers, there are mortgage calculators all over the internet. Two websites with good calculators that I often use are www.emortgage.co.nz and www.loan.co.nz.

Another useful site, with frequently updated info on different lenders' interest rates, is www.interest.co.nz.

* Got a question about money?

Send it to:

Money Matters

Business Herald

PO Box 32, Auckland

or e-mail: maryh@pl.net.

Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.