When you’re looking to purchase a new property, one of the first things to work out is how much you can feasibly borrow from a home loan lender. By knowing what your borrowing power is (and what you can comfortably afford to pay off for the duration of your mortgage), you can then start looking for properties in your price range.
However, it’s worth knowing that your borrowing power can vary from lender to lender – depending on the lender’s eligibility criteria, terms and conditions – and in some cases it’s possible to increase your borrowing capacity, so you have a broader range of property options to choose from.
So what factors will impact how much money you can borrow for your home loan, and what can you do to boost your borrowing power?
What does “borrowing power” mean for you?
Your loan “borrowing power”, or borrowing capacity, is the amount of money a lender is prepared to loan to you in order to purchase a property.
Before a home loan lender can provide you with an approved loan, they will need to assess your ability to secure the property (typically through an up-front deposit) and your ability to make loan repayments over time (most often in fortnightly or monthly instalments for an agreed number of years).
Having a large deposit and lots of assets works in your favour, but it doesn’t necessarily mean that you have the required cash flow to make successful repayments on your home loan. A customer’s borrowing power is an overall check of your ability to pay ongoing loan repayments.
What do lenders look for when working out your borrowing capacity?
Lenders will give you an indicative figure of the amount of money they will loan to you based on these factors:
1. Your total income: Your income is one of the biggest factors lenders look at when calculating how much you can borrow on your home loan, as your income will directly impact how much you can afford in mortgage repayments every month. If you’re buying a property with your partner, spouse or family, your repayment capacity may likely be higher (meaning you could be able to borrow a larger amount). Proof of regular savings and responsible spending habits are also important.
2. Your total assets: Any financial or property assets you have (such as a share or ETF portfolio, investment properties, vehicles, or other significant tangible assets) could improve your ability to borrow money on your home loan. Your assets demonstrate your ability to sustainably save and invest money over time, and show that you potentially have assets or additional cash flow available to improve your financial net worth.
3. Your total personal debts and expenses: Your debts and living expenses are just as important as your income, deposit, and savings when you are applying for a home loan. Any substantial debts, existing loans or other financial commitments you regularly put your income towards can affect your ability to make mortgage repayments, which is why a lender will want to know these early on. These can include credit cards, loan debts, your debt to income ratio, and any ongoing financial commitments you may have (such as childcare or school fees)
4. Your credit history: Your credit score plays a significant role in determining your borrowing capacity. If you can prove you’re a reliable customer who regularly meets their credit repayments on time, you can potentially borrow a higher amount of money. However if your credit history contains regular missed or late payments, you may find it much harder to receive approval for a loan. It’s always a good idea to obtain a copy of your credit history before lodging any loan applications.
5. Your estimated deposit: The size of your up-front deposit is one of the key ways a potential borrower can demonstrate their ability to meet home loan repayments. A sizeable deposit (we typically recommend at least 20%) shows a lender that you’re able to save money for a specific purpose over a period of time. The amount a lender will allow you to borrow may depend on the size of your deposit in comparison to the estimated value of the property, also known as the loan-to-value ratio (LVR).
6. The estimated property value: Once you’ve found a property, how much a mortgage lender is prepared to 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 how much money they can lend you.
How to boost your borrowing capacity
To boost your borrowing capacity, you can opt to increase your current income or cut your current expenses. To increase your income, you may think about asking for a pay rise, investing money into assets such as shares, or generating regular income from investment dividends. It can also pay to find a lender who favours your type of income – casual, contract, and full-time employment can be treated differently by different home loan lenders, so it’s good to make sure you’re including all forms of income in your documentation, such as rental income or dividend income.
Most Australians carry some form of debt, but it’s important to clear “bad” debt before applying for a home loan. Paying down significant personal debts (such as credit card debt, personal loans or student HECS debt above a certain threshold) can increase your borrowing power, or at least help get your loan application closer to approval. Other than reducing debts, reducing excess credit limits, trimming your current expenses, saving more money, and opting for the right home loan product can all help boost your borrowing capacity.
How much can I borrow on my home loan?
To calculate how much you can borrow on your loan, a borrowing power calculator can help give you a ballpark estimate figure to work with. However, you should keep in mind that a borrowing power calculator will only give you an estimate, and not an exact amount. For a more specific figure, you can get in touch with one of our home loan specialists today.
This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.