What Is Borrowing Power?
Borrowing power is the first thing that comes to mind when you think of buying a home. It is the amount of money a lender will lend you to buy a home. Before a lender lets you borrow a certain amount of money, it assesses your borrowing capacity to be sure you can make the loan repayments. By giving a rough idea of how much you can borrow, it helps you decide the price range of the property you want. Let’s take a look at a few factors that lenders look at to decide your borrowing power.
Factors That Affect How Much You Can Borrow
This is the first factor lenders will look at to determine how much you can borrow. A good income shows that you can afford the loan repayments. Lenders favour people who have had jobs with a consistent income for a long period of time. It can be harder for self-employed people because they might not have consistent income to show. Regular savings is also important because this shows that you can do the repayments regularly. If lenders see that you can afford higher loan repayments, they are likely to lend you more money. For example, if you are buying a property with another person, your repayment capacity may be greater, meaning you may be able to borrow more money.
Your Debts And Financial Commitments
Lenders are concerned about your debts and financial commitments because they affect your ability to make repayments. Your existing debts and other commitments may decrease the amount you can borrow or can even cause your loan application to be rejected. Lenders will review your current commitments, such as school fees, personal loans, car loans and any other ongoing loans you may have. The lower the burden of your financial commitments, the more money the lender is likely to lend you.
Your Living Expenses
Your expenses can affect the amount you can borrow. Lenders look at your living expenses because they want to know if you can afford the repayments without changing your lifestyle. If you have the habit of spending more and saving less, lenders may feel that you are not a stable borrower. Many borrowers plan to make adjustments to their lifestyle and apply for a home loan. Unfortunately, they end up defaulting because they go back to the lifestyle they are used to. Lenders assess your borrowing power by considering whether the mortgage repayments are going to affect your lifestyle.
Your Credit History
Your credit history is a vital part of assessing your borrowing bower. Lenders want to know if you have the history of defaulting on previous loans, credit cards or other lines of credit. They can limit how much you can borrow or even reject your application if there are any defaults or recurrent missed payments reflected in your credit history. However, if you have a good credit history, lenders look at you as a reliable borrower who has been meeting financial obligations on time. In this case, they may even lend you a higher amount of money.
Lenders want to be on the secure side in case you are not able to meet your repayments in the future. For this reason, they want to look at any existing tangible or intangible assets you have. It can be the cash you have on hand, property, homes, cars, jewellery, stocks or mutual funds, furniture, antiques or other items. If you have assets that tend to have more value, it could make a difference in the type of mortgage you qualify for and the loan amount you receive. This is because it demonstrates your ability to save and invest money over time.
Note: Don’t underestimate the importance of including all of your assets when you are filling out your mortgage application. Lenders will verify whether all assets belong to you and are traceable.
The Size Of Your Deposit
A home loan deposit can be viewed as an amount that you will be required to put down to be given a home loan. Lenders will take the size of your deposit into consideration when you apply for a mortgage. Most lenders require 20% of the purchase price as a deposit. Some accept lower deposits but you may have to pay Lenders Mortgage Insurance (LMI). While evaluating your home loan deposit, they are also concerned if you have saved 5% of the purchase price that you have saved yourself over time, normally referred to as genuine savings. A larger deposit reduces the risk to the lender and can qualify you for a higher loan amount and even a lower interest rate. It also gives you a better negotiating position and multiple lenders to choose from.
Home Loan Type, Term And Interest Rate
The amount you can borrow also depends on the interest rate and term of your home loan. If you are getting a loan with low fees and low interest rates, your repayments will be lower, which means you can borrow more. However, a higher interest rate can decrease your borrowing power because your repayments will be higher. The total period of the loan can also help determine how much you can borrow. For example, If your loan term is 30 years, you can borrow more because your repayments will be low compared with a 20-year loan.
Note: Use our mortgage repayment calculator to work out your home loan repayments with different loan sizes, interest rates, loan terms and repayment options.
Value Of The Property
Lenders will evaluate the worth of the property you want to purchase and decide exactly how much they can lend you. They will conduct a valuation of the property to ensure that it isn’t overvalued or undervalued. The bank may be willing to lend you more for a property that is worth more, depending on other factors, such as your income, debts and assets. The valuation will also help them see whether the property will provide a return to them if you default on your loan.
10 Ways To Improve Your Borrowing Power
Did you know you can increase your borrowing power? Let’s take a look at tips you can follow to do this. These tips will also help you improve your chances of getting approved for a home loan.
- 1. Close your credit cards or reduce their limits: Lenders take credit card liabilities into account when they calculate how much you can borrow regardless of whether they are being used or not! One way to increase your borrowing power in through closing unsecured credit cards or decreasing their credit limit.
- 2. Close unsecured debts: These include personal loans, car Loans and HECS debt. They are factored in as liabilities while servicing your loan. If you have adequate savings to repay the debts, this will enable you to maximise your borrowing capacity.
- 3. Reduce your living expenses: Lenders use the Household Expenditure Method (HEM) as a standard for calculating your living expenses. When estimating your living expenses, the bank will use your minimum living expenses as calculated via the HEM or your estimate, whichever is higher. A lower living expense increases your borrowing power, so, always try and bring down your living expenses prior to applying for a loan.
- 4. Apply for a longer loan term on your home loan: The longer the loan, the lower your repayments. 30-year loans are quite common in Australia and you can even get 40-year mortgages with some lender.
- 5. Consider a fixed-rate home loan: The majority of lenders usually add at least a 1.5% buffer on top of the advertised standard variable interest rate. But, in a fixed rate loan, most lenders offer you the advertised rate, or add a minimal buffer rate. This can make a huge difference to your borrowing power.
- 6. Change repayments to interest only: This is only recommended if after the completion of the interest-only period, you can make the principal and interest repayments comfortably.
- 7. Apply with a lender that has a favourable lending policy for your income/employment type: Some lenders will only use 50% of your bonus or overtime income to calculate your borrowing power, whereas other lenders will use the full bonus or overtime income. This will have a direct impact on the serviceability of your loan. So, applying with the right lender is key.
- 8. Consolidate unsecured debts: Consolidate debts into your existing mortgage to increase your borrowing power. The interest charged on your home loan is way cheaper than the interest charged in your car loan. By consolidating, you can reduce the total monthly repayments you make on both the loans. This will save you thousands of dollars and raise your borrowing power.
- 9. Rent out your property instead of living in it: This allows you to use the rental income and negative gearing benefits in the borrowing power calculation, giving you a significant boost to your borrowing power.
- 10. Check your credit report: Having a clear credit report means you will qualify with more lenders and are not assessed at a higher assessment rate, giving your home loan borrowing power a small boost.
Additional Tips To Increase Your Borrowing Power
If you’re self-employed, outdated financial evidence can be detrimental to your borrowing power. Banks assess your most recent two years’ tax returns and look at all your financial statements to make sure that your business is stable and the wage you pay yourself is sustainable to get a mortgage.
By keeping good financial records you’ll also be more aware of where your money is going and what it’s doing. This enables you to plan the budget for your new mortgage repayments.
If you don’t have up-to-date tax return records then you may qualify for a low-doc home loan, which has more flexible lending requirements than a standard home loan but will cost you a higher interest rate.
Bring All Your Shared Debts To Your Lender’s Notice
Did you know that if you share some debt with someone who isn’t part of the new loan application, banks will assume that you’re making all of the repayments on that debt?
For example, you have a $20,000 car loan that you took out with your partner and you alone are applying for a home loan with a bank. Most banks will calculate your borrowing capacity as if the $20,000 personal loan is yours only. In other words, they assume your partner isn’t making any repayments on the loan.
If you can show that the other person is able to cover their half of the repayments, some banks will only take into account your share of the debt.This can seriously improve your borrowing capacity
Split Child Support Payments With Your Ex-Partner
If you have an ex-partner and are paying full child support, this will be factored into your borrowing power calculation. One way to increase your borrowing power is through splitting your child’s expenses with your ex-partner.
For example, if you have two children they may be classed as your dependants. If you can prove that your ex-partner partially or fully provides for them, then the banks will lend you more.
When determining your borrowing power some lenders will also consider Family Tax Benefits A & B depending on the age of your children.
Use Our ‘How Much Can I Borrow?’ Calculator
You can use this calculator to calculate the maximum amount you can borrow. It can be completed in three easy steps:
- Input your household details.
- Input your income.
- Input your expenses and how much you would like to borrow. Commitments would include any current home loans you have, credit cards, personal loans, car loans and similar obligations.
- First, we try to find a lender from our panel of more than 50 lenders that can do it within standard policy.
- If no lender can do it then we try to get one to make an exception to its policy.
- If no lender can make an exception to the policy then we try to change the customer’s situation. For example, getting them to buy a cheaper home and cancel their credit cards.
- Finally, if a change in situation is not possible then we’ll tell you what you need to do to qualify in the future and follow up with you.
Frequently Asked Questions
Lenders can be very selective when calculating how much you can borrow. Casual, contract, and full-time employment are all treated differently by different lenders. A casual employee is considered to be riskier, and this perception alone can affect their borrowing capacity with some banks.
Different lenders also assess income types such as overtime and bonuses differently. For example, if you’re a shift worker who earns significant overtime, you may find that one lender uses only half your income while another uses the actual amount you earn.
So, whether or not your income will be accepted depends on what bank you are applying to.
Regardless of the income or employment type, we can help you find a lender that best suits your needs. Please complete our free assessment form or call us on 1300 889 743 to find out what we can do for you.
Each bank will assess your borrowing capacity differently, looking at various factors. Below are some major factors banks consider during your assessment.
Investors: Banks assess rent income and negative gearing benefits in very different ways. Investors with large portfolios are particularly affected in how much they can borrow because a lot of their funds are already committed.
Existing mortgages: Some lenders use a high assessment rate for your existing loans, whereas others don’t.
Large families: If you have more than two adults or three children in your household, each bank will assess your living expenses in completely different ways.
Many credit cards: The method of calculating the repayments on your credit card limits differs between each bank.
Get Approved For The Amount You Need!
At Home Loan Experts, this is the simplified process we follow to solve a loan scenario where your borrowing power is the main issue:
We have specialist mortgage brokers who can work out on your borrowing capacity and increase the amount you can borrow. So, Why not speak to us today? Call us on 1300 889 743 or fill in our online assessment form to get started.