What determines your home loan borrowing power?
Ready to buy a home, but aren’t sure how much you can afford to borrow? Working out your borrowing power can give you a good idea of how much a bank might lend you for a home loan.
What is borrowing power?
Borrowing power is the maximum amount of money you can borrow to buy a home. The higher your borrowing power is, the greater the home loan size you can borrow.
Borrowing power is based on your overall financial situation, not just your income or how many assets you already have. But, what do lenders look at when they calculate it?
What affects borrowing power?
Every lender has different criteria for working out your borrowing power, but your income, expenses, debts, and serviceability are the main ones.
Your household income
The amount of money you earn greatly affects your borrowing power. Your household income will be considered when the bank reviews your borrowing power, which includes your partner’s income if you’re in a relationship.
Your expenses
While income is important, your expenses are equally as important for borrowing power. This includes your daily living expenses, debts, and if you have any dependents (i.e. children).
Your debts
You might have a steady household income and low expenses, but if you’re up to your eyes in debt, your borrowing power will dramatically reduce.
Your serviceability
Your ability to effectively pay for and maintain a mortgage, especially if interest rates rise, is known as your home loan serviceability and it’s another factor that affects your borrowing power.
How to calculate borrowing power for home loans
The easiest way to get an idea of your borrowing power is to use a borrowing power calculator. This calculator can give you an estimate of how much a lender might let you borrow when you apply for a home loan.
But what happens if you can’t borrow as much as you’d hoped?
How to increase home loan borrowing power
Increasing your borrowing power requires you to review your income and expenditure, pay down debts, and increase your mortgage serviceability.
While it can be difficult to increase your income without taking on extra work or switching jobs, reducing your expenses is a much more achievable goal, especially if you start by creating a budget.
It’s also important to pay down as much of your debt as you can afford to. If your money is going towards credit card debt or you’re still paying off your car loan, then the bank will consider these a part of your pre-existing expenses, and your borrowing power will go down.
Now that you know what to look out for, use our borrowing power calculator to see how much you might be able to borrow!
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FAQs
Does borrowing power include the deposit?
Borrowing power is less about your home deposit or loan-to-value ratio (LVR), and more about your income. While lenders will be interested in your deposit size, they don’t account for it when calculating your borrowing power.
Why is my borrowing power so low?
If you’ve got low borrowing power, it could be a sign that your income or expenses, or a mixture of the two, aren’t optimal. If you’re spending too much relative to your income, or you’re just not making enough money to realistically pay for a mortgage, then your borrowing power will be low.
* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
** Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
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