How Much Can I Borrow?

One of the most popular questions home owners ask is how much can I borrow.

The answer to this question can vary wildly between lenders. The depends on many factors, but here are some of the key considerations:

How much do you earn
Do you earn bonus, commission and overtime
Do you work in an essential service such as Nurse, Paramedic or Police Officer
Are you self employed. If so are you a Sole Trader or do you have a company structure
What is your credit score
What are living expenses
What other debt do you have
How much savings do you have

These are just some of the key questions to consider, which is why it takes time and analysis to give an accurate answer.

There are many online calculators to assist in answering this question but the calculator is only as good as the information you input.

Did you know that most lenders will add a buffer of 3% to their actual rate when determining your borrowing power. This is a rule to protect the borrower. The purpose of this is to ensure you can afford the loan at todays interest rates, but also afford it should interest rates increase by 3%. Not all lenders have this approach. Some will assess your borrowing power using a 1% or 2% buffer. This can increase your borrowing power by a large amount.

Many people have credit cards, personal loans or HECS debt. All of these will reduce borrowing power. As a rough guide, a credit card limit of $10,000 may reduce borrowing power for a home loan in the realm of $60,000. One of the options to consider when applying for a home loan is your other debt limits. Does it make sense to reduce some of these unsecured debts to increase borrowing power. Or is it better to retain your savings and keep these facilities open. It is a good conversation to have with your mortgage broker when determining the best options for you.

If you are working in an Essential Service, the lenders may be more accepting of your overtime. For most people earning overtime, lenders will reduce this portion of your earnings by up to 20%. This is because overtime may not be a permanent part of your earnings, ongoing and consistent. Whereas if you are an Essential Worker many lenders consider overtime as part of ordinary everyday earnings and accept 100% of this income. This increases your borrowing power.

On the of the other key elements lenders look for assessing home loans is your credit score. Lenders have access to mountains of data and credit scores are an indication of whether the bank believes you are good borrower. Things that impact your credit score are how often you enquire for credit, the number of job changes you have had, the number of open facilities such as credit cards and personal loans and whether you have been late on any payments in the last two years. You may still be able to get a loan with poor credit. Many personal financial situations are complicated. However the simplest path is to pay credit facilities, including phone bills and utilities on time and only enquire about credit when you certain you want to apply.

Living expenses are a key factor in how lenders assess your borrowing power. Items such as school fees and private health insurance premiums may be seen as discretionary spending and likely reduce how much you can borrow. Everyday living expenses on items such as groceries, entertainment and general insurance may also impact borrowing capacity if you are spending more than the average household in these areas.

Self employed applicants generally are more complex, but offer more options when looking for a home loan. The rules applied by lenders vary a lot for self employed clients. Some of the key items banks will look for include consistency of income over the last 2 years, are there any loans for plant, equipment or cars in the company, did you pay yourself a salary from the company. These factors and many others, will guide toward the best lender. Especially for the self employed it is important to review the detailed position and align personal circumstances with the lenders current policy when recommending the option in your best interests.

A good rule of thumb when considering how much can I borrow is to look at your current lifestyle and consider how much you save on average each month. If for instance you save $2,000 per month at the moment, whilst paying rent of $3,000, this means unless you want to restrict your future lifestyle a good start point would be to ensure your home loan was not more than $5,000 a month.

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