If you're looking to buy a home, one of the first things you want to work out is how much you can borrow from a lender. By knowing what your borrowing power is, you can start to look for properties within your price range.
Your borrowing power can vary from lender to lender, and it's possible to increase your borrowing capacity so you can broaden your property options.
So what factors affect how much money you can borrow and how can you boost your borrowing capacity?
Your borrowing power or borrowing capacity is the amount of money a lender will loan you to buy a home.
Before a lender can issue you with a loan, they need to assess you on your ability to secure the property through a deposit and on your ability to make loan repayments.
Simply having a large deposit and lots of assets doesn't automatically mean you have the cash flow to make loan repayments. Your borrowing power is a measurement of your ability to fund ongoing loan repayments.
Lenders will give you an indicative figure of the amount of money they will loan to you based on these factors:
Your income is one of the first factors lenders will look at when determining how much you can borrow. Your income will dictate how much you can afford in mortgage repayments.
If you're married or are buying a property with your partner, your repayment capacity may be greater, meaning you may be able to borrow more money.
Proof of regular savings is also important as it tells a lender you are likely to be able to keep up with regular mortgage repayments.
Your debts and living expenses are as equally important as your income, deposit, and savings. Any outstanding debts or other financial commitments you regularly put your income towards could impact your ability to make repayments, which is why a lender will want to know these when determining your borrowing power.
Some debts or expenses may decrease the amount you can borrow, or can even cause your loan application to be rejected. These can include credit card or any other outstanding debts, your debt to income ratio, and ongoing financial commitments (such as childcare or school fees).
Your credit history can play a significant role in determining your borrowing capacity. If you can prove you're a reliable customer who regularly meets their repayments on time, you may be able to borrow a higher amount. In turn, if you have missed a few bills or credit card payments in the past, this can work against you when applying for a loan.
If your credit file contains missed or late payments, you may find it difficult to receive approval for a loan. This is why it's a good idea to obtain a copy of your credit file before lodging a loan application.
One of the ways a potential borrower can demonstrate their ability to make repayments is through the size of their deposit. A generous deposit (at least 20%) shows a lender you have the ability to save money over a period of time, otherwise referred to as 'genuine savings'.
The amount a lender will allow you to borrow may depend on the size of your deposit in relation to the value of the property, known as the loan-to-value ratio (LVR).
The type of home loan you choose and the term you plan to keep it for can also impact your borrowing power. A loan with low fees, a low interest rate, and with minimal features might mean your repayments are lower, and you can therefore borrow more. A longer loan term can also mean your monthly repayments are lower.
Conversely, a shorter loan term may save you thousands in interest, but increase your monthly repayments which may decrease your borrowing power.
Any existing assets you have, such as a share portfolio, investment properties, car/boat/motorbike, or other tangible assets may improve your ability to borrow. This is because they can also demonstrate your ability save and invest money over time.
Once you have found a property, how much a lender will lend you can depend on the value of that property. The lender will find out how much the property is worth by completing a property valuation, which will determine exactly how much money they will lend to you.
To increase your borrowing capacity, you can either increase your income or cut your expenses.
To increase your income, think about asking for a pay rise, investing money into assets such as shares, or making a regular income from dividends. It can also pay to find a lender who favours your type of income. For example, casual, contract, and full-time employment can be treated differently by different lenders. Ensure you're including all forms of income, such as rental income or dividend income, if applicable. Government benefits can be included as income by some (not all) lenders.
Lots of Australians carry debt of some sort, but it's important to clear debt before applying for a home loan. Paying down debts can increase your borrowing power, or at the very least, give your loan application the tick of approval.
Other than reducing debts, reducing excess credit limits, trimming expenses, saving more money, and choosing the right loan product can all help to boost your borrowing capacity.
To calculate how much you can borrow, a borrowing power calculator can give you a ballpark figure. However, keep in mind that a borrowing power calculator will only give you an estimate. For a more specific figure, get in touch with one of our home loan specialists.