Home loans 101: How much can
I borrow?

Getting a home loan can come with some uncertainties for all home buyers, but your borrowing power shouldn’t be one of them.

Borrowing power tells you how much money you are capable of borrowing from a lender. The greater your borrowing power, the more home loan options you have.

It’s an important step that any lender will take when assessing a home loan application. So in this article, we break down what borrowing power is, what influences it, how it is calculated, and how you can increase your borrowing capacity.

What is borrowing power?

Borrowing power, sometimes referred to as borrowing capacity, is simply the loan amount that a lender is likely to approve you for.

It is calculated based on your financial circumstances and if you have a higher borrowing power it means that lenders trust in your ability to repay a larger home loan.

Why is it important to know your borrowing power?

When you know what you borrowing power is, you can:

• Become more efficient in your property search as you’ll know what properties you can actually afford
  
  
• Find out how much your monthly home loan repayments could be. Make sure to consider fees and interest rates on top of this amount
  
  
• Feel more confident going into auctions or making offers on properties as you know what you can afford.

What affects my borrowing power?

Borrowing power is impacted by a number of factors. These may include:

1. Income

Naturally, lenders will want proof that you are financially able to make your monthly loan repayments. Income is generally the number 1 indicator of a borrower’s ability to repay their mortgage.

While it is a key factor, having a high income (relative to your desired loan amount) is not going to guarantee home loan approval. Let’s take a look at some of the other factors that influence borrowing power.

2. Everyday living expenses

Lenders want to get an idea of how well you will be able to manage mortgage repayments alongside your everyday expenses.

Everyday expenses can include things like food, travel, transport, clothing, entertainment, childcare and more.

As you get closer to applying for a home loan, it’s a good idea to avoid any unnecessary spending and make sure your budget portrays you as a financially responsible person.

If, for example, you have a high income but your living expenses are also high, your borrowing power might not be as great as you would think.

3. Debt

If you have any debts, such as existing home loans, personal loans, car loans or credit cards, lenders will want to ensure you can handle a new home loan obligation.

Having debt is common, but there are limits. While university tuition debt doesn’t usually raise too many concerns from lenders, excessive credit card debt might.

Additionally, lenders will look at your credit report to check for any issues with recent debt repayment. Try to make your debt repayments on time and consider cancelling credit cards or reducing your limits.

4. Family situation

When we talk about your family dynamics affecting your borrowing power, we’re talking about whether you’re applying for the loan on your own or with a partner.

Another thing lenders will want to know is if you have any dependents. Having children/dependents in your care affects your budget and expenses.

For example, if you pay a lot of money towards childcare, tuition or sports activities for your child, you’ll have less money to put towards mortgage repayments.

5. Assets

Lenders are likely to consider what assets you have when assessing your home loan application.

Assets like shares, genuine savings, property and other kinds of investments can paint a better picture of your financial situation.

6. Your employment

Having a stable job tends to be indicative of a stable income that will help you make loan repayments.

You may have more luck with increasing your borrowing capacity if you have been in a full-time job for over a year.

While it’s not impossible to get approved for a home loan if you’re self-employed or in a part time role, it can be more challenging.

If you’re applying with another person, your joint income and financial situation will be considered.

How can I calculate my borrowing power?

You can get an estimate of your borrowing power by using Aussie’s Home Loan Borrowing Power Calculator.

To ensure we give you a more accurate estimation of your borrowing power, we’ll ask you to provide some basic information including:

• Your details (e.g. how many people are applying for the loan, any dependents, whether you intend to be an owner-occupier or an investor)
  
  
• Your income
  
  
• Your expenses
  
  
• Any debt repayments.

How to boost your borrowing power

There are several things you can do that will potentially improve your borrowing power.

1. Sort out your finances: before you apply for a loan, gather all the documents you need and take the time to review your spending. See if you can make changes to your budget that will free up some money
   
   
2. Borrow within your means: avoid asking to borrow too much money. If you apply for a large home loan and the lender thinks you won’t be able to repay it, they may decline the application and you’ll have a negative credit inquiry in your credit file. If you do get approved, you may find yourself struggling to manage repayments
   
   
3. Review your credit score: when was the last time you looked at your credit history? It’s a good idea to know your credit score so you know if you need to improve it. Additionally, it’s smart to check for any reporting mistakes or inaccuracies that might appear on your credit report
   
   
4. Select a longer loan repayment term: lenders may be more likely to lend you a larger loan amount if it is being repaid over a longer period of time. So, consider opting for a 30 year loan term over a 25 year term if you want to borrow more money
   
   
5. Streamline your debt: debt consolidation could be a good way to reduce your financial obligations and stress
   
   
6. Just keep saving: saving up a larger home loan deposit can prove responsible savings habits and reduce the amount of money that you need to borrow. Having a lower loan to value ratio (LVR) can reduce your chances of being charged Lenders Mortgage Insurance (LMI) too.

Apply for home loan pre-approval

For a more formal indication of how much you’ll actually be able to borrow, it’s smart to apply for home loan pre-approval.

Home loan pre-approval means that your lender is likely to lend you a specific loan amount. While not unconditional, pre-approval can speed up the property search and settlement process.

This is because sellers often favour buyers who are pre-approved and the lender is already familiar with you and your financial situation. Home loan pre-approval is free, so it’s worth looking into if you’d like a faster property purchase.

Your local Aussie Broker can work with you to figure out what your borrowing power could be. Book in an appointment today to find out more about your home loan options.

Keep learning