How much can I borrow?
Before a bank or lender can issue you with a mortgage or home loan product, they legally need to assess you on your ability to not only secure a property through the means of a deposit, but also on whether your finances will allow you to tend to the entire life of the loan.
Otherwise known as your ‘borrowing power’, this is a specific criteria that each prospective buyer will be compared against. The outcome of whether they will be eligible for a home loan product will be greatly determined by their financial situation at the time of lodging a home loan application.
Ultimately, the lender will need to determine whether you have the capacity to fund ongoing home loan repayments, which also includes additional fees and charges beyond just repaying the principal amount of the loan with interest.
These might include lenders mortgage insurance, stamp duty, and other home loan application fees.
To get a head start, it’s a good idea to become versed on your home loan borrowing power as early as possible, with a rough guide provided through Your Mortgage’s borrowing calculator.
Want to know your true borrowing power? Speak to an expert to find out
How does the borrowing calculator work?
The borrowing calculator provided considers a few of the important factors that can often determine borrowing power, or how much you would be eligible to take out on a home loan.
Estimated results are drawn from figures that relate to your annual income, such as your net salary before tax, the amount of rental income you receive from any rental properties, and whether you have any other form of regular income. It also asks you to note the number of dependents, or individuals that will be assigned to the home loan – an important determiner, as a partnership can generally increase total household income.
These figures are then compared against your outgoing monthly expenses, such as living expenses, repayments on other loans, other financial commitments and fees, and the combined limit of your credit cards, store cards and any overdrafts.
Whilst calculations are pre-set to be based on a fixed interest rate of 5% per annum over a loan term of 25 years, these specifications can be changed through the calculator. It’s important to note, however, that the borrowing calculator is limited to only certain home loan criteria, and the results are to be used as a guide only.
It’s also useful to understand how changing the interest rate and life of the home loan can affect how the loan is serviced.
For instance, the lower the interest rate, the higher your borrowing power will likely become, as the total amount of interest applicable to the entire life of the loan will be lower – assuming interest rates don’t change.
Furthermore, if the loan term is shortened, this will decrease the amount of interest that is required to be paid across the entire life of the loan. This means your monthly repayments will predominately pay down the principal amount of the loan, however, monthly repayments will be substantially higher as a result.
In saying this, it’s important to note that the provided borrowing calculator does not factor in interest rate fluctuations. Over a 25-30 year loan term, it’s likely that your interest rate will change.
What is my borrowing power?
Your borrowing power depends on your total monthly stream of income, and how much you are left with after your monthly living expenses and other financial commitments are taken out of your income.
This will reveal the ‘extra’ or disposable income you can tap into each month, which will speak for the maximum amount you are able to contribute towards monthly home loan repayments.
How does my income affect my borrowing power?
The more income you can prove you earn to a lender, the greater your borrowing power is likely to be.
Consequently, the likelihood of being issued with a home loan becomes more attainable – especially if your expenses or debts are well covered by your income.
Sometimes, high-income earners may be surprised to learn that their borrowing power is low, because they have a high number of financial commitments. This leaves them with very little disposal income, which gives lenders a reason to reduce the amount they’re willing to lend.
How do my expenses affect my borrowing power?
On the other end of the spectrum are your expenses. The total sum of these are just as important, because the higher your monthly expenses – whether that be as a result of your lifestyle choices or other debts that are being repaid – the more likely it is that they will negatively impact your borrowing power.
It is especially limiting if your expenses outweigh your income, causing the lender to believe you don’t possess the required amount of disposable income to be able to securely tend to a home loan’s monthly repayments.
Banks and lenders are ultimately trying to assess you as a credit risk. If your expenses outweigh your income, regardless of how much you earn, then the lender perceives you as ‘high risk’.
Questions about expenses vs income? Speak an expert for help
How does my credit limit affect my borrowing power?
Credit cards are factored into your expenses, even if you have never exceeded the allocated credit limit or found yourself behind repayments.
For instance, if you have a credit limit of $5,000, the lender will calculate the minimum repayment on a $5000 debt, in order to understand how much you would need to repay if you maxed out your card.
Since this calculated amount will be allotted to your monthly outgoings, it can effectively diminish your borrowing power. Therefore, if you have any credit cards that are open but not being used, it may be worth considering closing them, or at least reducing the credit limit, to increase your borrowing power.
Furthermore, it’s important to tend to any outstanding credit card debts prior to applying for a home loan through a lender, as any red flags on your credit history can also pose the risk of the lender denying your application.
How can a mortgage broker help increase my borrowing power?
A qualified mortgage broker holds the valuable tools and industry insight to best determine your borrowing power prior to you applying for a home loan through a lender.
Mortgage brokers are also connected to a range of different lenders within the market, and clearly understand the set of criteria that each different lender deploys to determine whether a borrower would be eligible for a home loan. Some lenders, for instance, offer better loan terms and conditions for first homebuyers, while other lenders may have more flexible interest rates or policies for investors.
Things you should know about this calculator
The estimated figures made by this calculator are to be taken as a reference or guide only. Results don’t factor in that interest rates can alter or fluctuate throughout the entire life of the home loan, with calculations being rather based on fixed interest rates.
Interest only periods are also not taken into account, nor that interest only periods last for a limited amount of time, which thereafter variable interest rates start to work, greatly impacting the total amount of the loan.
Interest rates used to reach a calculation are only to be used as a general example and interest rates may change at any given time.
Estimated results also don’t include additional charges and fees that entail entering into a home loan, or buying a property; such as deposit, stamp duty, application fees, lenders mortgage insurance and other various account keeping and land transfer fees.
It should also be noted that calculations do not indicate the likelihood of a loan approval, nor do they act as a result for a loan approval.
A formal approval should be secured with the independently sourced help of a financial adviser or mortgage broker, and results depend on the information you provide to the lender as part of their home loan application process; such as income, expenses and credit rating.
In the case of investment loans, negative gearing is not factored into the calculator’s results.