Having a clear understanding of what your borrowing power is before house hunting will help give you a realistic idea on what property you can afford to buy.
Your borrowing power or borrowing capacity is the amount of money a lender will loan to you.
Some people believe that by having a large deposit and several assets, you will be automatically approved for a home loan. However, there are two parts of the assessment that lenders go through. Firstly, lenders need to make sure you have the funds upfront for the deposit and other expenses and then they make sure the borrower will be able to afford the repayments going forward. This part is when borrowing power comes in.
So how does a lender calculate your borrowing power? It is basically a detailed look at your income and your commitments and then how much you have left over to make further loan repayments.
The types of things that are taken into consideration include:
- Income from working, rent from investment properties, family tax income and income from share investments
- Number of applicants and dependants to help give an estimate of living expenses
- Credit card limits
- Personal/car loan repayments and payments on other mortgages
- Other commitments like maintenance, HECS/HELP debt etc.
There are several online calculators that can help give you an idea on how much you can borrow. However, to get a more accurate answer, speak with a lender directly and they can give you your options. You may have certain unique exceptions in regards to income or work that cannot be included in an online calculation and is better explored in person.
After doing your own research and speaking with lenders you find that you are not able to get the loan amount you want, there are ways to improve your borrowing power. Some examples include:
Savings: Saving more will not only mean you will have a bigger deposit to put towards your property purchase, but lenders may regard your application highly as they can see you have the willpower to save.
Reduce debt: Credit cards, store cards, interest free facilities and other personal loans can have a huge impact on your borrowing power. If these are restricting the amount you can borrow, focus on paying these off. Also, if you have any unused credit cards, cancel them. Even if you don’t have any money owing on a credit card, lenders will still include these credit limits in their calculations regardless.
Improve your credit report: If you know you’ve missed a few repayments on other financial commitments, now is the time to get organised. These defaults will show up on your credit report and can affect your borrowing power. Make an effort to ensure you meet repayments on time. If you can show a lender that you are making a conscious effort to right your repayment history, it could improve your borrowing capacity.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan
Anouska Linz is Manager, Online Sales at State Custodians and has over 10 years’ experience in financial services, both in broking and banking. Holding a bachelors degree in accounting, Anouska quickly discovered a love for mortgage lending and assisting people to achieve their home ownership goals. She leads a team of highly experienced lending specialists who are passionate about finding lending solutions which result in real wins for the customer. She is also a massive netball fan.
For more information on our home loans, visit www.statecustodians.com.au or call 13 72 62.