How much you may be able to borrow if you want to take out a home loan is calculated by taking your net income after tax and deducting your expenses, such as groceries, petrol, credit card, loans, and other debts and financial commitments.
A borrowing power calculator is a helpful tool to give you an idea of your borrowing capacity. But, it doesn’t consider your complete financial position and the home loan eligibility criteria, so it should just be used as a guideline.
Having a ballpark figure of what your borrowing power is will allow you to start looking for a property to purchase with a price range in mind.
How a Borrowing Power Calculator Works
A borrowing power calculator considers your current financial obligations to determine the home loan amount you could be eligible to receive. Put an estimate if you’re unsure, but the more accurate you can be, the better.
You’ll be asked to enter all of your income streams, including your net salary before taxes, rental income, and any other income you receive regularly.
All of your day-to-day expenses, any loan payments you’re already making, and any other financial commitments you have, like insurance and extra contributions to your super.
Then you need to input the interest rate, as well as the loan term you would prefer. The calculator will calculate the borrowing power according to a fixed interest rate.
What Influences Home Loan Borrowing Capacity?
Take note that various factors can influence how much a lender will offer you to borrow, aside from your income and expenses.
- Lenders also consider things such as how much outstanding personal loan or credit card debt you have, as well as what your limits are for open credit card accounts or overdraft facilities. Even if you don’t currently owe anything on a credit card but it has a $35,000 limit, the lender could consider that $35,000 as potential debt, with subsequent potential credit card repayments as an additional expense.
- Lenders also consider future interest rate rises and determine whether you will be able to handle higher loan repayments should that happen.
- Another important factor is your credit history. If you have a good credit history, it gives lenders security that you will be able to honour your loan repayments successfully.
- Having a steady source of income is generally required in order to have your home loan approved. However, it’s not as simple as saying that the more money you make, the more you can borrow. A lender will look at more than just your income to assess how much you can afford to borrow. They will also look at your overall financial situation, such as dependents, spending habits, and other ongoing financial commitments.
How To Increase Borrowing Power
If you aren’t happy with the initial estimate of how much you can borrow for a home loan, there are ways that you can increase your borrowing power.
Save a Larger Deposit
Because lenders prefer evidence of consistent savings, the larger your deposit is, the greater your borrowing power will be. Additionally, having a bigger deposit reduces your monthly home loan repayments, as well as the interest, and you could be eligible to waive lenders mortgage insurance.
Reduce Your Spending
Spending less for a few months will enable you to save more for a larger deposit and inevitably raise your borrowing power. Think about things like going for walks and runs instead of paying for a gym membership, and cooking all meals at home instead of eating out or getting Uber Eats.
Reduce Your Credit Card Limits
If you have any credit cards that you aren’t currently using, you should cancel them. Because lenders consider credit cards as if they’re drawn to their full limit, it’s best to reduce their credit limit to as low as possible.
Pay Off All Your Debts First
Debts can lower borrowing capacity when going for a home loan, especially high-interest debts such as a personal loan or credit cards. If lenders see that you consistently honour your outstanding credit card monthly repayments, it will be in your favour when they consider your credit record.
Enquire With Different Lenders
Different lenders will be willing to lend you different loan amounts depending on the criteria they have and their own methods of calculation. Therefore, you should check with several lenders to see what the differences are, as they can be significant.
Increase Your Income
Instead of cutting down so that you have more disposable income, consider just making more money. Can you get extra shifts at work, negotiate for a promotion or pay raise, or get a second job?
Get a Guarantor
A member of your family can use the equity in their home to guarantee your home loan. Their property then acts as security. Having a guarantor can even mean a lender will lend you 100% of the purchase price, plus fees and charges like stamp duty and legal costs.
How The Mortgage Agency Can Help
If you’re thinking of buying a home or investment property, the mortgage brokers from The Mortgage Agency can help you navigate the entire process.
We’ll explain the different types of home loans available to you, and the different features to consider. We’ll help you determine the loan term you’d prefer, and how much you can comfortably afford for the monthly loan repayments.
The Mortgage Agency is in collaboration with various lenders, so we’ll collect your home loan options from the different lenders and compare how your borrowing power varies between them.
Once you’re ready, we’ll help you through the entire home buying process, from working out how much deposit you can afford, to interest rates and the application process.
Contact us and we’ll answer all your home loan questions. We can help you reach your financial and personal objectives when it comes to home ownership.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.