Do you want to know how much you can borrow? See what factors affect your borrowing power and tips to improve your application.
Borrowing power or borrowing capacity are commonly used terms to describe how much you are able to borrow. It is worked out by starting with your income and expenses and much you can afford to make in repayments.
The repayment amount will equate to a particular loan amount and loan term. Add to this the deposit you have saved after deducting the purchase costs like stamp duty, to give you an idea of how much you can afford to spend.
How much you can borrow is also limited by how much a lender is willing to lend against a particular property.
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Find out how much you may be able to borrow with our borrowing calculator!
What is serviceability?
Serviceability is the lending term used for the calculation of your borrowing power. If a loan fails serviceability it simply means that you cannot afford to borrow the amount you requested.
Income is really important when it comes to lending as this is what you will use to make the repayments. You may have lots of cash or assets but unless there is income flowing from these, you would not qualify for most home loans without other income.
Due to its importance, income is carefully scrutinized. Lenders want to determine that your income is dependable and likely to continue and will have different rules as to how much income they will use, minimum time periods and what they will and will not accept. Lenders look at:-
- If you are employed, whether you are full time, part time, casual, contract or on commission
- If you are self employed, how long you have been self employed and two years trading history
- Your occupation and industry you are employed in and your employment history
- How long you have been with your current employer and whether a probationary period still applies
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Extra income such as bonuses, overtime, commission payments or rent income aren’t always included in full or sometimes at all. Chat to potential lenders about this income upfront and get them to do a borrowing power calculation before you apply.
Financial commitments require repayments, so these need to be deducted from your income. Some lenders bring these in at their actual repayments while some debts a higher repayment amount may be used.
For example if you have an investment property and make interest only repayments, the repayment used for the calculation may be the principal and interest repayment which is much higher.
The liabilities lenders will include are:
- Existing properties
- Existing mortgages
- Personal loans
- Car loans
- HECS debt
- Interest free store cards
- Credit cards & their limits
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Most lenders will factor in repayments on the full credit card limit even if there is nothing owing. Some lenders will disregard it if you can show that you pay it in full each month. Chat to potential lenders and if need be reduce the limit back to only what you need.
In recent times regulators have increased the emphasis on lenders making thorough enquiries into what borrowers spend on basic living expenses. Previously an index would be used to estimate the cost of living for households. As this may not reflect reality, in order to lend responsibly, lenders will use the higher of your estimate or the index amount.
Added to that will be any ongoing commitments that you have, such as:
- Additional cars
- Mobile phone contracts
- Child maintenance
- Gym memberships and pay TV
It will be worthwhile tracking your expenses for a month so that you have these details handy.
Your assets could help improve your ability to borrow. Your assets should be more than your debts. If you have lots of debts but these are not reflected in your assets it could indicate that you spend more than you earn and pose a greater risk to the lender.
Assets include thing like:
- Investment properties
- Car, motor bike, boat
- Shares & managed funds
- Home contents
The loan term has an impact on how much you can borrow. The term is the length of time that the loan is taken out for. Repayments on a 20 year term will be much higher than on a 30 year term.
Borrowers can choose a longer term but choose to make repayments so they pay their loan off over a much shorter term.
When repayments on the new loan are factored in, they are not based on the actual interest rate of the loan but an interest rate that is 1.5% – 2%. This ensures that you are able to meet repayments if interest rates rise.
While savings are not in any of the calculators, they are a pre-requisite for most loans. The amount that you are saving each month is a good indicator of the spare cash you have to meet repayments on a loan in the future.
If your deposit comes from a gift or windfall, the amount that lenders are willing to lend can reduce to less than 85% of the property. Lenders will want to see savings statements showing the deposit amount building up over at least 3 months.
For a loan for your own home, some lenders will include the rent you currently pay as part of your spare cash.
Generally, the more you save the better. Some benefits include:
- Competitive interest rate. Interest rates can be tiered with the cheapest rates for borrowers who lend 80% or less of the value of the property, increasing at 90% and 95%.
- More loan options. The more you have saved the more loan options you will have.
- Avoid Lenders Mortgage Insurance. This one-off payment is to protect the lender if you default. Lenders will usually charge this if you borrow more than 80% of the property’s value. It can amount to thousands of dollars and is usually added to your loan. The more you borrow, the higher the fee is.
This is the amount of money you borrow for a home compared to the value of the property. To find out more about LVR click here.
Lender will have a limit on how much they are willing to lend against a particular property. Generally you can borrow up to 80% of the value of the property without mortgage insurance, and up to 95% with mortgage insurance added.
These percentages may be differ for certain types of properties, locations and the use of the property (home you live in or an investment property).
If the property or location is considered high risk, it may mean that you will face some restrictions. Some include:
- The home loan may be less competitive
- You may need to contribute more money to the purchase
- Your financial position may be more heavily scrutinised
Read more about how the location and property affects lending here.
Your credit score and credit history helps lenders determine your credit worthiness. If you have missed repayments, defaults or lots of credit enquiries, a lender may:
- Decline your loan
- Reduce the amount they are willing to lend
- Consider a specialist loan that may come with higher interest rate and fees
- Show you can save. Putting more money aside may help to show lenders that you are capable of budgeting and saving money. A bonus is that the extra money you save can be put towards your deposit.
- Reduce your debt and commitments.
- Credit cards
- Store cards
- Interest free facilities
- Personal loans
- Car loans & leases
- Pay TV
- Gym membership
- Reduce the limit on your credit facilities to how much you actually need.
- Purchase the property as an investment. If you are able to live at home rent free, purchasing an investment property may enable you to continue to minimise your expenses while still getting into the property market.
- Take on a second job or turn a hobby into an income stream. Potentially you will need to do the two jobs consecutively for a period of time before they will use the second income.
- Improve your credit report. There are a number of things you can do to improve your credit report:
- Make repayments on time
- Don’t make multiple credit enquiries
- Repay any defaults as soon as possible
- If any mistakes appear on your credit report, have it removed quickly.
Your borrowing power plays an important role in lending. If you need help calculating the loan amount, LVR or need to know what loan you qualify for, our lending specialists can help. Just call 13 72 62 or leave your details here and they will contact you