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It is important to gain a good understanding of what your borrowing power is in the beginning as this will help determine the property you can afford to buy.

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

Just because you have a large deposit and lots of assets does not automatically mean that you have the cash flow to make repayments on a new loan. Some people confuse this with borrowing power. There are two parts to the overall calculation that lenders go through, one is to ensure that you have the funds upfront for the deposit and other expenses, and the second in being able to afford the repayments going forward. The second one is all about borrowing power.

So how does a lender calculate your borrowing power? It is basically a detailed look at your income and your commitments and then how much you have left over to make further loan repayments.

The types of things that are taken into consideration include:

  • Income from working, rent from investment properties, family tax income and income from share investments
  • Number of applicants and dependants to help give an estimate of living expenses
  • Credit card limits
  • Personal/car loan repayments and payments on other mortgages
  • Other commitments like maintenance, HECS/HELP debt etc.

If you are shopping around for a home loan and want to compare lenders, then online home loan calculators are a great tool to get a general idea of your borrowing power. However, to get a more accurate answer on how much you could borrow, it is best to speak with a lender directly. You may have certain unique exceptions that the calculator doesn't take into account, that are better explored in person.

After doing your own research and speaking with lenders you find that you are not able to get the loan amount you want, there are ways to improve your borrowing power. This can be done either by increasing your income, decreasing your commitments or saving more so that you don't need to borrow as much. Some examples include:

Show you can save: Saving more will not only mean you will have a bigger deposit to put towards your property purchase, but lenders may regard your application highly as they can see you have the willpower to save.

Get out of debt: Credit cards, store cards, interest free facilities and other personal loans can have a huge impact on your borrowing power. If these are restricting the amount you can borrow, focus on paying these off. Also, if you have any unused credit cards, cancel them. Even if you don't have any money owing on a credit card, lenders will still include these credit limits in their calculations regardless.

Improve your credit report: If you know you've missed a few repayments on other financial commitments, now is the time to get organised. These defaults will show up on your credit report and can affect your borrowing power. Make an effort to ensure you meet repayments on time. If you can show a lender that you are making a conscious effort to right your repayment history, it could improve your borrowing capacity.

The above is general commentary only and is not advice tailored to any individual’s financial situation. It is recommended that you seek professional advice with regards to your financial and taxation affairs.

  • Use a calculator to get an estimate of how much you can borrow.
    Try one here.

  • See if you qualify. To get a more accurate idea of how much you can borrow with State Custodians,
    click here.

  • Call our Lending Specialists and they can do the calculation for you over the phone plus answer any questions you have at the time. Talk to us on 13 72 62.