A lender uses these factors to calculate serviceability – your ability to repay the loan – to determine whether lending to you is a good investment.
How do they calculate my serviceability?
Lenders add up all of your income and subtract your living expenses and any other repayments you have. What’s left provides an indication of how much you can afford to borrow.
Our How Much Can I Borrow Calculator uses the same methods as the lenders’ credit departments and shows your borrowing power with several lenders in one go.
Generally, we recommend using an online calculator as a rough guide and getting a pre-approval to confirm the amount you can borrow.
What is the right amount to borrow?
Your borrowing power can give you an idea of how much you can spend. But how much are you willing to spend? How much are you comfortable borrowing?
When lenders calculate the amount you can borrow, they assume interest rates will rise by at least 2 percentage points.
When you work out whether you can afford to make repayments on a loan of a certain amount, you should do the same thing. This will show you whether you’ll feel comfortable making repayments even if interest rates go up.
Also consider what will happen if your circumstances change when deciding how much to spend on a house. For example, having a baby may present challenges for your finances in the future.
How do I improve my borrowing power?
The easiest way to improve your borrowing power is to choose a lender willing to offer you more. However, this may not make a huge difference for everyone.
Luckily, there are ways that can improve your borrowing capacity.
3 smart tips to increase your home loan borrowing power
1. Reduce or close your credit cards
When assessing your loan application, banks assume your credit cards are fully used.
Reducing your credit card limit or cancelling some of your cards will boost your borrowing power. For example, reducing your credit card limits by $10,000 could add around $50,000 to your borrowing power.
The same applies to debts with entities such as buy now, pay later facilities like Afterpay, personal loans or car loans. If you settle your debts, you can borrow more.
2. Reduce your living expenses
Lenders may look at the last three months of your bank account and credit-card statements to know your living expenses.
They may also calculate the minimum living expenses for a family of your size and income. They will then use the higher of these two figures to work out how much you can borrow. Most people spend more than the minimum the bank calculates.
If you reduce your spending in the three months before applying for a loan, you can usually borrow more. However, some lenders take a commonsense approach – they know that you don’t have to get Uber Eats every night.
3. Apply with the right lender
No matter what your circumstances, choosing the right lender is key.
The way each lender assesses your income, debts and expenses is different. I’ve seen differences of more than $200,000 between lenders. For property investors, the differences are usually larger than for home buyers.
People who have more overtime income, allowances, bonuses or commission income may find significant differences between lenders because of how each one calculates your income. As a general rule, we find non-bank lenders usually allow people to borrow more than banks and their rates are similar or sometimes lower.
If your borrowing power is important to you, your mortgage broker will consider this when deciding which lenders to recommend.
Does a guarantor increase my borrowing power?
Yes, you can borrow more by opting for a guarantor home loan.
Using a guarantor means your loan is secured by two properties, reducing the lender’s risk. But it also means that if you’re unable to repay the loan, the lender may sell the guarantor’s property as well as yours.
It’s usually your parents who guarantee your loan and we suggest they seek legal advice before doing so.
How can we help?
We’re working on a course that can help you understand what affects your borrowing power and how you can boost it. Stay tuned for it!
To speak with one of our mortgage brokers about your situation, call 1300 889 743 or complete our free, no-obligation assessment form.