While it’s impossible to be 100% certain what each lender looks for, there are some key considerations most lenders will look into when assessing your ability to meet your repayments and whether or not to grant you a home loan.
Here are seven factors that can impact your borrowing power.
1. Your combined income and financial commitments
Before a lender will grant you a home loan, they will consider your income stream, your ability to repay the loan, and your employment security. Self-employed people may have a harder time showing that they are financially secure, while people who’ve held jobs for a solid period of time will be looked upon more favourably.
Your financial commitments such as existing debts, car loans, and lines of credit will also be taken into consideration. The rule of thumb is that the lower your financial commitments, the more money the lender may be willing to lend you.
If you’re buying a property with another person, your repayment capacity may be greater, which in turn could increase your borrowing power.
2. Your living expenses
When working out your borrowing capacity, lenders will also consider your living expenses. Lenders look into these areas because they want to ascertain if you can truly afford the repayments while still maintaining the lifestyle you’ve become accustomed to.
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 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.
3. The size of your deposit
The more money you have put aside for your property deposit, the easier it will generally be to obtain finance and increase your borrowing capacity.
Lenders also want to see that you’re able to save a sizeable amount of money over a period of time (this is otherwise referred to as “genuine savings”).
4. Your credit history
Your credit history is a vital part of your home loan application process. The lender will check to ensure that there is no record of you defaulting on previous loans, credit cards, or other lines of credit.
If you can prove that you’re a reliable borrower who meets their 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. Your credit history is a vital part of your home loan application process. The lender will check to ensure that there is no record of you defaulting on previous loans, credit cards, or other lines of credit.
5. Your assets
Your lender will also want to look at any existing assets you may have, such as a car, share portfolio, properties, or any other tangible assets that can be used by them should you not be able to meet your repayments.
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.
6. Home loan type, term, and interest rate
The amount you can borrow may also depend on the interest rate and term of your home loan. The lower the interest rate, the lower your repayments may be. A loan with a longer term will mean lower repayments but more paid in interest over the life of the loan, whereas a loan with a shorter term may save you on interest but means your repayments will be bigger.
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 manage over a 30-year period than they would be over a 25-year period, even though the interest rate for the former will be more.
7. Value of the property
How much a lender will lend to you can also 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.
Ways you could be sabotaging your borrowing power
1. Having too many credit cards with high limits
When lenders assess your home loan application they will take into consideration your credit card limits.
So if you have three cards with a combined credit limit of $20,000 that can have a negative impact on your borrowing capacity, as lenders assume the limit has been fully drawn.
Consider how much credit you really need and reduce the number and limits of credit cards to improve your borrowing power.
2. Taking out personal loans
Personal loans can attract high interest rates and are generally used for things that depreciate in value, like a car or the latest TV.
Taking out too many personal loans can significantly impact your borrowing power because it makes lenders think that you’re unable to save, live beyond your means, or use personal loans to pay off other debts like credit cards.
3. Not paying bills on time
Your credit history can play a significant role in determining your borrowing power and not paying bills on time (such as electricity, phone or internet bills) can have a negative impact on your credit history, which impacts your borrowing power.
Lenders will wonder that since you can’t keep on top of your bills, how will you meet your mortgage repayments on time?
4. Changing jobs too often
If you’re known for hopping from job to job, lenders will be concerned that your propensity for switching jobs frequently could result in you struggling to pay your mortgage. The same can be said for those who are self-employed or work in the gig economy, as their incomes can be inconsistent.