What Impacts How Much I Can Borrow?

Ready to buy a house but don’t know how much you can borrow? Did you know if you have a credit card, the bank assesses you on the card’s limit and not how much you owe? Read on for our step-by-step guide to the factors that can impact how much you can borrow for your home loan.

How much can I borrow from a bank or lender in Australia?

Before you get approval for a home loan, your bank or lender has a legal requirement to assess your ability to afford the loan. This includes your deposit amount and whether your financial situation will allow you to pay for the loan.

This assessment by the lender is called your “borrowing power”. It is determined by what your finances look like at the time of lodging your home loan application. Each bank and lender can vary slightly on specific terms, but generally, your finances declared in your loan application will be compared against criteria that will determine your borrowing power. 

Get ahead in your home-buying journey by speaking to an experienced mortgage broker to understand what forms part of the home loan assessment process. It will include items like:

  • Regular home loan repayments
  • Additional fees and charges, if included
  • Lenders mortgage insurance, if required
  • Stamp duty
  • Other home loan application fees

What is my borrowing power?

Borrowing power is a term that refers to how much you can borrow for a home loan while taking into consideration your living expenses and financial commitments. Put simply, your borrowing power is:

Your total monthly income – monthly living expenses – other financial commitments = disposable income you have available for home loan repayments.

The “extra” money you have left after all expenses in a month tells the lender the maximum amount you would be able to contribute towards monthly home loan repayments. This recurring disposable income is then calculated into your borrowing power, which is the maximum amount that lender will allow you to borrow.

How does my income affect how much I can borrow from the bank?

You may think higher income equals greater borrowing capacity. Generally, the more income you can prove to a lender, the greater your borrowing power. 

However, some high-income earners are surprised to learn a lender has deemed their borrowing capacity lower than expected. This is due to the ratio of income to financial commitments. If you have less disposable income after your expenses are taken into account, the amount you can borrow from your lender will be less. More importantly, if your income comfortably covers your expenses and debts and you have extra income left over to pay for your loan, you will be in a better financial position to service a loan.

How do my expenses affect my borrowing power?

If your monthly expenses are greater than your monthly income, this can significantly affect your borrowing power. Regardless of what your actual income is, if the bank or lender deems your expenses too high compared to your income, you could be perceived as “high risk”. This in turn affects your borrowing power because the lender will assess that you do not have enough disposable income to pay the home loan’s monthly repayments.

On the other hand, if you can show your monthly expenses are comfortably covered by your total monthly income

How does my credit limit affect how much mortgage I can afford?

If you have credit cards, the credit limits you have on those cards can decrease your borrowing power. When assessing your expenses, lenders take the allocated credit limit into account, not the amount you owe on it.

The lender will calculate the minimum repayment on the credit card’s limit, say a $5000 debt, to understand how much you would owe each month if you maxed out your card. This amount is then calculated in your monthly outgoings and can lower your overall borrowing power.

If you have credit cards and not using them, it is a good idea to either close them or reduce the limits before you proceed with your loan application. If you have any outstanding credit card debt, this can raise red flags on your credit checks and risk a loan approval so, if you can, it is important to aim for no credit card debt when applying for a home loan.

How can a mortgage broker help?

An experienced mortgage broker can help you determine your borrowing capacity prior to formally applying for a loan. We can assist at any time during your home-buying journey, including when you are beginning to research what you need for a home loan and if you are ready to apply for a loan.

Mortgage brokers have a legal duty to work in your best interests. Qualified mortgage brokers are connected to a range of lenders and understand the specific criteria different lenders have for their application processes.

For everything you need to know about how much you can borrow for your home loan, talk to us and we’ll ensure you are matched with the right lender and home loan that suits you.

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