Understanding Borrowing Capacity

Before house hunting, knowing how much you can borrow from your lender is beneficial. Your borrowing capacity is the amount a lender will lend you to buy a property. It sounds simple but it’s not. All kinds of factors determine the amount a lender comes up with, and your loan amount can vary from lender to lender (sometimes by $100s of thousands). Read on to find out more about borrowing capacity.

How much could you borrow?

There are two parts to the overall calculation that lenders work through in determining your borrowing capacity – the amount they will lend you for a mortgage. 

Lenders will look at your income and expenses to calculate how much you have left over to repay your loan. Even with a large deposit and several assets under your belt, it doesn’t mean you have the cash flow required to repay a mortgage. 

The types of things that lenders will take into consideration include:

• Salaries and wages.
• Rental income from investment properties.
• Investment income.
• Number of applicants and dependents to determine estimated living expenses.
• Credit card limits.
• Personal or car loan repayments and payments on other mortgages plus Interest Free loans.
• Other commitments like maintenance, student loan repayments, buy now pay later etc.

How to improve borrowing capacity?

If you find that your borrowing capacity falls short of your desired amount, there are ways you can improve it. You can either increase your income or decrease your expenses. Here are some ways to do this:

• Increase savings – a bigger deposit not only means less to borrow, but it also improves your negotiation position and shows the lender that you can save.
• Decrease debt – clearing credit card debt is crucial for boosting borrowing capacity. Moreover, any unused credit card limits will still be counted in the lender’s calculations. With that, it is best to consult your mortgage broker about potential cancellations before applying for a mortgage.
• Improve credit report – defaults and missed payments show up as a negative on your credit report so you must manage any debt repayments carefully and avoid missing payments or making late payments.

While online mortgage calculators are useful in calculating a rough estimate of the amount you could borrow, if you are shopping around for a home loan it’s worthwhile getting in touch with your Lending Connections broker to discuss your borrowing capacity and lending options.