Whether you’re a first home buyer or property investor, you need to understand what borrowing capacity is, and why it is so important.
Borrowing capacity is basically the amount of money that a lender will loan to you to buy a property. It is crucial that as a buyer, you have sufficient borrowing capacity to acquire a home loan or buy property. While this may sound fairly simple, borrowing capacity involves various considerations. Lenders typically calculate your borrowing capacity using an assessment rate to evaluate your loan application.
There are many online borrowing calculators that can be found on lenders’ websites to help consumers assess their borrowing capacity. However, it is highly recommended that you consult with a broker, who will have greater access to more lenders and can provide tailored guidance for your personal financial circumstance. Additionally, one lender or bank may only have access to their own borrowing capacity calculators and may have varying loan criteria.
This assessment rate of your borrowing capacity will depend on many factors. A lender may load your existing loans by a buffer and take into account all your income streams (e.g. employment income, rental income, etc.). Your financial dependents are also considered in the process, alongside how many applicants (in total) are applying for a mortgage. Other key factors include: credit history, type of employment (casual, part-time, full-time, contractor, etc.), your annual salary before tax, living expenses, other loan repayments (car loans, personal loans, etc.), other commitments, total limit of credit cards and overdrafts, size of the loan compared to the property, and more.
If you have a high number of unsecured debt, such as personal loans and credit card debt, then this will limit your borrowing power. This is because their short repayment terms typically have high monthly repayments. To combat this issue, you can consider debt consolidation which essentially enables you combine your separate debts into a singular loan. Additionally, for many lenders, poor credit history is a significant future liability. To further improve your borrowing capacity, you must increase your savings, find ways to reduce debt and improve your credit report by minimising defaulted or late payments.
Under the National Consumer Credit Protection Act (2009), lenders must adhere to regulatory guidelines that encourage responsible lending. In particular, there is heavy emphasis on preventing situations where the borrower could not pay or could only repay a loan with substantial hardship. This legislation protects both consumers who have limited borrowing capacity, and lenders who may be reluctant to provide funds to borrowers who may be unable to repay the loan.
If you’re looking to improve your borrowing capacity and improve your chances of buying a house or investment property, then don’t hesitate to contact us!