Factors that affect how much you can borrow

By Michael Mata
"How much can I borrow?" is normally the first question you ask yourself when purchasing a property, or seeking a change to your current loan structure. The amount you can borrow is determined by a number of factors. While you cannot be 100% certain of what each lender will require, there are key considerations most lenders will look into when assessing your ability to meet your repayments, and thus, whether or not they will grant you a home loan.

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.
  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. Hence, self-employed people will 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, 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.
  1. Your living expenses and the cost of maintaining your lifestyle
When working out your borrowing capacity, the lender will also consider your living expenses and the cost of maintaining your lifestyle. They 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 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.
  1. Your property deposit
The more money you have put aside for your property deposit, the easier it will be to obtain finance and increase your borrowing capacity. Lenders also want to see that you’re able to save a sizable amount of money over a period of time (this is otherwise referred to as “genuine savings”).
  1. Your prospective property and its value
Just because you want to buy a house priced at $500,000 doesn’t mean the lender believes that house is worth $500,000.

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.
  1. The loan type and term of the loan
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 will be. A longer-term loan will mean lower repayments, but a shorter-term loan may save you on interest.

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.
  1. Your assets
Your lender will also want to look at any existing assets, such as a car, share portfolio, properties, or 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.
  1. 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 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.