A lot of terms get thrown at you when you’re buying a house. You’ve probably heard of borrowing power while looking into home loans, but what exactly is it?
Sadly, it’s not a superpower you magically gain when you find your dream home. Borrowing power is an assessment used by banks and lenders to determine how much money they’ll let you borrow.
Lenders will want to ensure you have the funds upfront for a deposit and other expenses, and then to afford repayments going forward. The latter is known as borrowing power.
It’s important to understand what your personal borrowing power is at the beginning of the purchasing process, as it will determine the type of property you can afford to buy.
How will a lender calculate my borrowing power?
A lender will take a detailed look at your income and financial commitments, factoring how much you have left over to make future repayments.
The types of things your lender will consider include:
- The size of your deposit
- Income from work, investment properties, family tax, and share investments
- If you can afford higher interest rates than current ones, in the event interest rates rise
- Number of applicants and dependants, to give an estimate of living expenses
- Credit card limits and/or debt
- Personal/car loan repayments and payments on other mortgages
- Other commitments like maintenance and HECS/HELP debt.
Is there any way to improve my borrowing power?
Yes! To start, online home loan calculators can give you a general idea of your borrowing power. It’s best to speak with a lender if you want a more personalised or in-depth answer.
Having money behind you is crucial for a lender. A bigger deposit is more important than having a high income, because it shows a pattern of positive saving. High credit limits are seen as a red flag, as lenders will assume you may spend up to your card limit at any moment. To a lender, a $20,000 credit card limit is essentially the same as having a $20,000 credit card debt. Consider lowering your limits if possible.
Don’t be tempted to go to the other extreme and understate your expenses. You want a home loan that puts you in a better financial position than you are currently in, not a stressful one. Organise any other financial commitments or debts you may have, as any defaults will show up on your credit history and affect your borrowing power.
The bottom line
Even if it’s not your first home, buying a home can be stressful. Understanding and improving your borrowing power could be the difference between having the funds to buy your dream home and missing out. Do your research into different lenders and repayments plans before you make a decision. Keeping a strong credit score, saving for a deposit, and considering your daily expenses are the first steps to increasing your borrowing power.