You can use the Mortgage Calculator to get a rough indication of how much you can afford to borrow based on your income and expenditure.
You may also consult a mortgage broker to find out what your borrowing capacity is.
Listed below are the factors that can affect your borrowing power.
- Your combined income and financial commitments
Your financial commitments—such as existing debts, car loans, and lines of credit—will also be taken into consideration. The rule of thumb is, the lower your financial commitments, the more money the lender will be willing to lend you.
Also, if you’re buying property with another person, your repayment capacity may be greater, which in turn will increase your borrowing power.
Credit card limit
The combined credit limit on your credit cards, store cards, and overdrafts will play a large role in determining how much money you can borrow when applying for a mortgage. Regardless of how much debt you’ve accumulated on your credit cards, your combined credit limit will curtail your borrowing power because banks know that credit card limits can be used at some point in the future.
In short, lenders will not only look into how much debt you’re in, but into how much debt you could get into as well.
- Your living expenses and the cost of maintaining your lifestyle
Many people apply for exorbitant home loans and plan to make adjustments to their lifestyles to meet the new financial commitment. This is one of the reasons why many people end up defaulting on their home loans, as they inevitably revert to the lifestyle that they’re used to.
To avoid problems down the road, it’s important to work out your living expenses and the cost of maintaining your lifestyle. Once you have these figures, you’ll be able to work out a mortgage repayment scheme that won’t adversely affect your standard of living.
- Your property deposit
- Your prospective property and its value
How much the lender will lend you will depend on how much the property is worth. To find out, the lender will conduct a valuation of the property to ensure that it isn’t overvalued or undervalued. Valuing the property will also help the lender determine if the property will provide a return to them should the worst case scenario occur and they have to repossess your home.
- The loan type and term of the loan
Generally, the longer the term period, the less financial stress you’ll face in trying to meet your repayments. For example, your repayments may be easier to manager over a 30-year period than it would be over a 25-year period, even though the interest rate for the former will be more.
- Your assets
When applying for a home loan, be sure to list as many assets as you can. Include the assets’ insured value, and list down any investments and savings.
- Your credit history
If you can prove that you’re a reliable borrower who meets his financial obligations on time, you may be able to borrow a higher amount. Of course, if there are any defaults or late payments mentioned in your credit history, this may work against you when you’re trying to obtain a home loan.