Borrowing Power Explained
- How is my borrowing power assessed?
- What impacts your borrowing power
- How you can improve your borrowing power
If you’re considering buying a home or investment property, one of the first things that come to mind is ‘how much can I borrow?’
Understanding your borrowing power is the first step towards buying a property and knowing what sort of things lenders will assess to determine this will set you up to make it a smooth and easy process.
Regardless of your employment arrangements, whether you who are self-employed, have newly arrived in Australia, have income from overseas, or are an expat wanting to buy an investment property in Australia, Brighten offers a range of competitive home loan products available to Prime and Near Prime, Resident and Non-Resident borrowers.
How is my borrowing power assessed?
To accurately assess your borrowing power, a lender will look at your employment situation; your existing debts and savings; how you spend your money; whether you’re a single borrower or borrowing as a couple, and if you have dependants.
Other factors will influence the amount you can borrow regardless of whether you are buying a home to live in or an investment property and whether you need to borrow to pay lenders mortgage insurance, stamp duty, and any fees associated with purchasing a home.
Many lenders provide a borrowing calculator to help you assess your borrowing power before you begin your search. This provides an estimate of how much you can borrow.
What impacts your borrowing power
Income, debt and commitments
Lenders consider your ability to repay the loan by assessing your current financial situation. Each borrower’s employment situation will impact their ability to receive a home loan and lenders consider whether you are employed full-time, part-time, as a contractor or self-employed.
During the assessment process, lenders will also look at the whole picture of your current financial commitments, employment situation, lifestyle, and credit history to determine whether you can afford the loan.
Brighten’s expertise is in assessing more complex financial situations, such as the self-employed, expats, non-residents and people who recently moved to Australia with shorter employment history.
Credit history
Your credit history plays a vital role in determining your borrowing power, as it helps lenders understand your financial health, i.e., if you make repayments on time, if you have credit defaults in the past, and if you have any outstanding debts.
LVR
The Loan-to-Value Ratio (LVR) is the amount you are borrowing, represented as a percentage of the value of the property you are buying or refinancing. The bigger your deposit, the lower the LVR will be. If your deposit is less than 20% of the property’s value, your home loan will most likely incur a Lenders Mortgage Insurance (LMI) fee.
Your assets
All of your tangible assets – such as share portfolios, investment properties, cars, motorbikes or boats – demonstrate your savings ability and provide evidence that you can fund your lifestyle.
The home loan term, type and interest rate
A home loan with low fees and a low-interest rate means that you can increase your repayments, thereby increasing your borrowing power. Longer-term loans reduce your monthly repayments but also increase the lifetime of your loan, and shortening the length of your loan can save you in interest in the long run but will make your monthly repayments higher.
Owner occupied or Investment property
In some states and territories, there are incentives to assist first home buyers in purchasing a home they live in, which may positively impact your borrowing power. If the property is going to become an investment and produce rental income, this may see your borrowing power increase.
How you can improve your borrowing power
If you’re looking to purchase a property but are concerned about your borrowing power, there are many steps you can take to increase your chances of funding your dream property.
Increase income
Consider ways you could increase your income, whether that’s increasing salary, changing roles or taking a second job.
Cut expenses
Assess your current lifestyle and identify opportunities to reduce your outgoing expenses. For example, spending less on entertainment and shopping.
Reduce debt
If you can, you should repay or decrease current loans. This assures lenders that you are in a better financial position to focus on repaying your home loan.
Reduce credit limits
Having a credit card isn’t always bad but having a high credit limit could impact your borrowing power. Before exploring your loan options, look at reducing your credit limit. Even if you don’t owe any money on a credit card, the limit may count as a debt, as theoretically – you could owe up to that amount. Look to consolidate existing cards into one credit card and close any lines of credit you don’t need.
Despite all these helpful tips above, the best way to accurately assess your borrowing power is to talk to a home loan expert who can review your specific situation and provide you with professional advice and guidance.
Try our Borrowing Calculator
Brighten’s online borrowing calculator provides you with an estimate based on your current financial situation and helps you understand what you can potentially borrow. This is the easiest way to quickly assess what you can afford based on your current financial situation and helps you understand where you can adjust your current finances to achieve your goals.
Brighten offers a range of competitive home loans and our experienced team are available when you need them to help you navigate your home loan journey.