What are the factors to consider in determining the capacity of the borrower if they will want to make a loan discuss?

Your borrowing power and borrowing capacity will depend on factors like your income, family size, location, current debts, type of loan, and the lender that you choose.

There are a number of things that you can do to increase your borrowing power and improve your chances of being approved for a loan.

Video Summary On Borrowing Power

10 Ways To Improve Your Borrowing Power

• 1. Close your credit cards or reduce their limits: Lenders take credit card liabilities into account when they calculate how much you can borrow regardless of whether they are being used or not! One way to increase your borrowing power in through closing unsecured credit cards or decreasing their credit limit.
• 2. Close unsecured debts: These include personal loans, car Loans and HECS debt. They are factored in as liabilities while servicing your loan. If you have adequate savings to repay the debts, this will enable you to maximise your borrowing capacity.
• 3. Reduce your living expenses: Lenders use the Household Expenditure Method (HEM) as a standard for calculating your living expenses. When estimating your living expenses, the bank will use your minimum living expenses as calculated via the HEM or your estimate, whichever is higher. A lower living expense increases your borrowing power, so, always try and bring down your living expenses prior to applying for a loan.
• 4. Apply for a longer loan term on your home loan: The longer the loan, the lower your repayments. 30-year loans are quite common in Australia and you can even get 40-year mortgages with some lender.
• 5. Consider a fixed-rate home loan: The majority of lenders usually add at least a 1.5% buffer on top of the advertised standard variable interest rate. But, in a fixed rate loan, most lenders offer you the advertised rate, or add a minimal buffer rate. This can make a huge difference to your borrowing power.
• 6. Change repayments to interest only: This is only recommended if after the completion of the interest-only period, you can make the principal and interest repayments comfortably.
• 7. Apply with a lender that has a favourable lending policy for your income/employment type: Some lenders will only use 50% of your bonus or overtime income to calculate your borrowing power, whereas other lenders will use the full bonus or overtime income. This will have a direct impact on the serviceability of your loan. So, applying with the right lender is key.
• 8. Consolidate unsecured debts: Consolidate debts into your existing mortgage to increase your borrowing power. The interest charged on your home loan is way cheaper than the interest charged in your car loan. By consolidating, you can reduce the total monthly repayments you make on both the loans. This will save you thousands of dollars and raise your borrowing power.
• 9. Rent out your property instead of living in it: This allows you to use the rental income and negative gearing benefits in the borrowing power calculation, giving you a significant boost to your borrowing power.
• 10. Check your credit report: Having a clear credit report means you will qualify with more lenders and are not assessed at a higher assessment rate, giving your home loan borrowing power a small boost.

Additional Tips To Increase Your Borrowing Power

If you’re self-employed, outdated financial evidence can be detrimental to your borrowing power. Banks assess your most recent two years’ tax returns and look at all your financial statements to make sure that your business is stable and the wage you pay yourself is sustainable to get a mortgage.

By keeping good financial records you’ll also be more aware of where your money is going and what it’s doing. This enables you to plan the budget for your new mortgage repayments.

If you don’t have up-to-date tax return records then you may qualify for a low-doc home loan, which has more flexible lending requirements than a standard home loan but will cost you a higher interest rate.

Bring All Your Shared Debts To Your Lender’s Notice

Did you know that if you share some debt with someone who isn’t part of the new loan application, banks will assume that you’re making all of the repayments on that debt?

For example, you have a $20,000 car loan that you took out with your partner and you alone are applying for a home loan with a bank. Most banks will calculate your borrowing capacity as if the $20,000 personal loan is yours only. In other words, they assume your partner isn’t making any repayments on the loan.

If you can show that the other person is able to cover their half of the repayments, some banks will only take into account your share of the debt.This can seriously improve your borrowing capacity

Split Child Support Payments With Your Ex-Partner

If you have an ex-partner and are paying full child support, this will be factored into your borrowing power calculation. One way to increase your borrowing power is through splitting your child’s expenses with your ex-partner.

For example, if you have two children they may be classed as your dependants. If you can prove that your ex-partner partially or fully provides for them, then the banks will lend you more.
When determining your borrowing power some lenders will also consider Family Tax Benefits A & B depending on the age of your children.

Frequently Asked Questions

We Help You Get Approved For The Amount You Need

A simplified process to try to solve a loan scenario where your borrowing power is the main issue, goes something like this:

• First we try to find a lender from our panel of almost 40 lenders that can do it within standard policy.
• If no lender can do it then we try to get one to make an exception to the policy.
• If no lender can make an exception to the policy then try to change the customers’ situation (for example, buy a cheaper home / ask the employer to waive probation). For example, if you cancel your credit cards then you can borrow x amount.
• Finally, if a change in situation is not possible then we’ll tell you what you need to do to qualify in the future and follow up with you.

Our mortgage brokers will work with you to get you the amount you need to buy your dream home, call us on 1300 889 743 or fill in our online assessment form to get started.

If you're looking to buy a home, one of the first things you want to work out is how much you can borrow from a lender. By knowing what your borrowing power is, you can start to look for properties within your price range. 

Your borrowing power can vary from lender to lender, and it's possible to increase your borrowing capacity so you can broaden your property options. 

So what factors affect how much money you can borrow and how can you boost your borrowing capacity?

Your borrowing power or borrowing capacity is the amount of money a lender will loan you to buy a home.

Before a lender can issue you with a loan, they need to assess you on your ability to secure the property through a deposit and on your ability to make loan repayments. 

Simply having a large deposit and lots of assets doesn't automatically mean you have the cash flow to make loan repayments. Your borrowing power is a measurement of your ability to fund ongoing loan repayments. 

Lenders will give you an indicative figure of the amount of money they will loan to you based on these factors:

Your income is one of the first factors lenders will look at when determining how much you can borrow. Your income will dictate how much you can afford in mortgage repayments.

If you're married or are buying a property with your partner, your repayment capacity may be greater, meaning you may be able to borrow more money. 

Proof of regular savings is also important as it tells a lender you are likely to be able to keep up with regular mortgage repayments. 

Your debts and living expenses are as equally important as your income, deposit, and savings. Any outstanding debts or other financial commitments you regularly put your income towards could impact your ability to make repayments, which is why a lender will want to know these when determining your borrowing power.

Some debts or expenses may decrease the amount you can borrow, or can even cause your loan application to be rejected. These can include credit card or any other outstanding debts, your debt to income ratio, and ongoing financial commitments (such as childcare or school fees). 

Your credit history can play a significant role in determining your borrowing capacity. If you can prove you're a reliable customer who regularly meets their repayments on time, you may be able to borrow a higher amount. In turn, if you have missed a few bills or credit card payments in the past, this can work against you when applying for a loan.

If your credit file contains missed or late payments, you may find it difficult to receive approval for a loan. This is why it's a good idea to obtain a copy of your credit file before lodging a loan application. 

One of the ways a potential borrower can demonstrate their ability to make repayments is through the size of their deposit. A generous deposit (at least 20%) shows a lender you have the ability to save money over a period of time, otherwise referred to as 'genuine savings'. 

The amount a lender will allow you to borrow may depend on the size of your deposit in relation to the value of the property, known as the loan-to-value ratio (LVR). 

The type of home loan you choose and the term you plan to keep it for can also impact your borrowing power. A loan with low fees, a low interest rate, and with minimal features might mean your repayments are lower, and you can therefore borrow more. A longer loan term can also mean your monthly repayments are lower.

Conversely, a shorter loan term may save you thousands in interest, but increase your monthly repayments which may decrease your borrowing power. 

Any existing assets you have, such as a share portfolio, investment properties, car/boat/motorbike, or other tangible assets may improve your ability to borrow. This is because they can also demonstrate your ability save and invest money over time.

Once you have found a property, how much a lender will lend you can depend on the value of that property. The lender will find out how much the property is worth by completing a property valuation, which will determine exactly how much money they will lend to you.

To increase your borrowing capacity, you can either increase your income or cut your expenses.

To increase your income, think about asking for a pay rise, investing money into assets such as shares, or making a regular income from dividends. It can also pay to find a lender who favours your type of income. For example, casual, contract, and full-time employment can be treated differently by different lenders. Ensure you're including all forms of income, such as rental income or dividend income, if applicable. Government benefits can be included as income by some (not all) lenders.

Lots of Australians carry debt of some sort, but it's important to clear debt before applying for a home loan. Paying down debts can increase your borrowing power, or at the very least, give your loan application the tick of approval. 

Other than reducing debts, reducing excess credit limits, trimming expenses, saving more money, and choosing the right loan product can all help to boost your borrowing capacity.

To calculate how much you can borrow, a borrowing power calculator can give you a ballpark figure. However, keep in mind that a borrowing power calculator will only give you an estimate. For a more specific figure, get in touch with one of our home loan specialists. 

CALCULATE YOUR BORROWING POWER