Before getting a pre-approval, when it comes to getting a home loan for the house of your dreams, your borrowing power, also known as your borrowing capacity, plays a pivotal role. This blog is here to answer common questions and provide insight into this crucial aspect.
Once you’ve got this borrowing power estimate, it’s like having a price tag in your mind when you go house hunting, it helps you stay on track and find a place that fits your budget.
So, think of it as your first step towards that home buying journey!
How is Borrowing Capacity calculated?
We take your annual income and subtract your expenses, which can be influenced by things like the size of your family, bills, groceries, and petrol. We also consider any other debts you might have like credit card balances car or personal loan and other financial commitments such as private health insurance. The more accurate the info you feed into the calculator, the closer you’ll get to a real-world estimate of your borrowing capacity. Understanding your expenses is a great place to start.
How do I find my borrowing capacity?
You’re probably wondering, how much can I borrow? While there are numerous online home loan calculators available, for the most precise estimate, it is recommended that you speak with a mortgage broker. A mortgage broker or Home Lending Specialist has the expertise to thoroughly evaluate your financial situation and provide a more accurate borrowing estimate as your borrowing capacity can vary from bank to bank. Engaging with a mortgage broker can also help you obtain a pre-approval, a valuable asset when making an offer on a home and inform you about potential government grants and schemes, like the First Home Owners and Stamp Duty Grants.
How do I improve my borrowing capacity?
With rising interest rates, lenders have become increasingly cautious when it comes to extending loans. To prevent people from financing more than they can afford for their home loan, each bank has their own guidelines when it comes to assessing borrowing power. Below are some suggestions we recommend to increase your borrowing capacity prior to applying for a loan.
- Lower Your Credit Card Limits – Credit history counts!
It’s a good practice to reduce your credit card limits, even if you don’t carry any outstanding balances. This not only reduces your potential debt but also demonstrates responsible financial management. Take this opportunity to streamline your finances by cancelling cards you no longer require. - Include any Additional Incomes
When assessing your borrowing power, make sure to include all supplementary sources of income. This can encompass second jobs, dividends, rental income, bonuses, and commissions. These additional income streams can significantly enhance your overall borrowing capacity. - Reduce Debts
To boost your borrowing capacity, consider reducing any existing loans you might have, including car loan or personal loans. Lowering your outstanding debt levels can increase your ability to take on additional financial commitments and improve your loan eligibility.
Why did my borrowing power decrease?
As interest rates have been on the rise, your borrowing capacity has been taking a hit. Let’s break it down: Suppose you’re a single borrower with a solid $100,000 annual income and you’re eyeing a principal and interest loan with a 4.99% interest rate. Your borrowing power would be a loan amount of roughly $531,000. But when that interest rate nudges up by just 0.25% to 5.24%, your borrowing capacity shrinks to $518,000. Rewind to the days when interest rates were as low as 2.00%, and this same borrower could have secured a loan amount of nearly $700,000! That’s roughly a 30% drop in your borrowing power.
I have a good salary, why can’t I borrow more?
Having a steady net income is a crucial factor in determining your borrowing capacity, yet it’s not as straightforward as assuming that the more you earn, the more you can borrow.
When gauging your borrowing power, we consider not only your income but also your existing monthly living expenses, as well as your overall financial situation and other factors. These aspects can influence your borrowing power than your income alone.
Looking for a home loan? Wanting to know how much you can borrow?
Are you feeling overwhelmed by terms like Lenders Mortgage Insurance and Principal and Interest Repayments? Loan Monster has over 13 years of experience in the financial industry, simplifying the jargon to make it easily understandable and assisting countless satisfied homeowners in financing their dream homes. Whether you’re looking for your first home or considering refinancing, we’re here to provide expert guidance in determining your borrowing capacity and securing a pre-approval.
Speak to the team at Loan Monster as there’s lots of bank offers and promotions out there right now, we can sort through them all and show you which ones are going to be better for you.
