As a first-time home buyer, investor, or second-time homeowner, it is natural to want to know what your borrowing capacity is, you want to know how much a lender is willing to lend you.
Knowing your borrowing capacity empowers you to make informed decisions, explore suitable property options, and negotiate confidently with vendors.
A lender will ask you how much income you earn, what your current debt situation is and other general questions about your finances. From there they can give you information about an indicative borrowing capacity.
Sounds simple and easy, and in truth it is if you know how a lender looks at varying aspects
of what they call the key factors that may impact borrowing capacity.
In this comprehensive guide, Clark Finance Group will walk you through factors that influence your borrowing capacity, how to calculate it, and some helpful tips to maximize your home loan options.
1. Factors Surrounding Borrowing Capacity
Your borrowing capacity is not solely determined by your income. Lenders consider a range of factors to assess your ability to repay the loan. Understanding these factors can help you prepare a strong loan application and obtain the funds you need.
1.1. Income and Employment Stability:
Your income, including salary, wages, shift work, overtime, commission, bonuses, rental income, or self-employment earnings all play a pivotal role in determining your borrowing capacity.
Employment status and history will also be considered. As an example, casual employment with most lenders will not be considered if less than 6 months OR may require a certain time within employment for use of overtime, bonus and commission income to be used.
Lenders assess your income and employment in various ways and understanding how each lender reviews these is Clark Finance Group’s specialty.
1.2. Existing Debts and Liabilities:
Lenders consider your existing debts, such as credit card limits, existing home loans,
personal loans, car loans, HECS/HELP and other financial commitments such as Buy Now Pay
Later facilities when calculating your borrowing capacity.
Lenders may add buffers on some existing debts and will work off limits (not your balance) when calculating their debt repayment.
Lower debt levels may increase your capacity to borrow.
1.3. Living Expenses:
Your day-to-day living expenses are crucial in determining how much you can afford to borrow.
Lenders analyse your spending patterns, including bills, groceries, utilities, Menulog/UberEats, your takeaway habits, and discretionary spending.
This allows lenders to work within their own measurements to ensure you can manage loan repayments comfortably with buffers in play.
1.4. Credit History:
Lenders review your credit score and report history to assess your risk as a borrower.
A positive credit history can enhance your position, with lenders using a credit report to risk rate your application.
1.5. Interest Rates and Loan Terms:
Calculated interest rates and the loan term also impact your borrowing capacity.
A lower interest rate and longer loan term can decrease your monthly repayments and
improve overall borrowing capacity. There are varied factors accounted for when calculating the interest rate and loan term, and the team at Clark Finance Group will help with how these are calculated.
2. Calculating Your Borrowing Capacity
To get an estimate of your borrowing capacity, you can use various online calculators that generalise the factors mentioned above and give a general guide, however understanding how each key factor works is why working with us at Clark Finance Group enables you to comprehensively know exactly where you may stand.
2.1. Assessing Your Income:
We help you gather all your sources of income, including your salary, rental income, and any additional income streams.
We then review your income and match you to the best lender to strengthen your borrowing capacity.
2.2. Deducting Existing Debts:
Working with you via our portal or in discussion, we will look through your finances and existing liabilities to determine ways to increase your borrowing capacity.
Using lenders’ buffers and policy, we will match you with the best lender, to again increase your borrowing capacity.
2.3. Considering Living Expenses:
Using your bank statements and discussing with you, we review your living expenses, such as recurring bills, groceries, entertainment, and other essential costs. One-off expenses or out-of-the-ordinary expenses will be mitigated during this review.
Lenders will use a standardized living expense assessment known as HEMS or what has been declared during your review, whichever is higher.
2.4. Applying Interest Rates and Loan Terms:
After we review your income, debts and living expenses, Clark Finance Group will then review what lenders best match your requirements.
Most lenders will review your overall profile and apply varying buffers on their rates depending on what your loan-to-value ratio is with them, and possible lender mortgage insurance.
These factors directly impact the size of the loan you can qualify for.
3. Maximizing Your Borrowing Capacity
At Clark Finance Group we structure your finance journey with us to work as a team.
We know and understand that for most property buyers having a higher borrowing capacity can expand your options when searching for your dream home or increasing your property portfolio prospects.
Part of our financial journey is our Review, Research and Recommendation stage, during this stage, we can provide you with strategies on how to maximise your borrowing capacity.
Here are some helpful tips on how to boost your borrowing capacity that we have found
beneficial to our clients in achieving their property dreams:
3.1. Reduce Existing Debts:
As stated previously, lenders will work off limits, not the balance owing for various continuing debts such as credit cards, BNPL facilities, etc.
Reducing the limit on a credit card you hardly use, cancelling that BNPL facility that you opened to use once, using some of your savings to pay out and close your car loan or personal loan are all plausible ways to increase your borrowing capacity.
Clark Finance Group will work with you based on your own circumstances to maximise your
potential borrowing capacity and guide you on these options and give you the direction needed to achieve it.
3.2. Enhance Your Credit Score:
Clark Finance Group, as part of our finance journey with you, will complete a read-only “free credit check.”
Reviewing your credit report as a team and addressing any issues that might arise will assist you with your borrowing capacity, these may include a closed credit card from a while ago still being open and you working on having it taken off your report, showing consistent repayments on a facility or not realising that you have an unpaid default or overdue account.
3.3. Minimize Unnecessary Expenses:
Like reducing existing debts, reviewing and understanding your daily expenses will assist with your borrowing capacity.
We review your budget and identify areas where you could cut back on discretionary spending and continue to monitor these with you monthly.
4. Some Common Questions:
Working with our clients we have come across some common questions; these may assist
you when looking at your maximum borrowing capacity and help you understand how
important being educated is for your own finance journey.
4.1 HECS/HELP debt
Does this impact my capacity as it comes out of my pay, or do I pay once a year with my tax? Yes, HECS/HELP debt is considered a liability by lenders.
They will work on the standard HECS/HELP debt repayment as outlined by the ATO and this repayment is taken out monthly as a repayment.
4.2 Poor Credit History
If I have missed a payment on a BNPL service, or have had a default, or have not applied for credit in the past does this impact my borrowing capacity?
The short answer is YES, lenders will look at your credit report when reviewing your capacity. At Clark Finance Group we understand that life does not always go to plan, and we can help you get a home loan even if you have a poor credit history or work with you on how to
improve your credit score/ report.
4.3 What is LVR and Why Does it Matter?
Loan-to-value ratio (LVR) can factor in the key metric that lenders use with a home loan application to buy a property.
LVR shows the ratio of the value of your property to the size of your loan as a percentage.
Some Financial institutions use LVR to assess the risk of a loan, with a higher LVR
representing a higher risk to the lender. This will impact their interest rate offering and this could impact your overall borrowing capacity.
4.4 Will all lenders lend me the same amount?
No, each lender will have different methods of calculating income and have various risk profiles for lending. These can change over time due to changes in a variety of internal and external factors.
Here at Clark Finance Group, we know what each lender is looking for and who will lend you
more. We talk to lenders daily and will ask you the right questions to make sure we
maximise your borrowing capacity and present the right loan options for you.
5. The Role of Clark Finance Group
Navigating the complexities of borrowing capacity and home loans can be overwhelming. Working with the team at Clark Finance Group, as a team we become an invaluable ally throughout the process. Here’s how they assist you:
5.1. Personalized Financial Assessment:
Our clients experience a stress-free finance journey with us.
We work with you to conduct a comprehensive assessment of your financial situation, including a pre-assessment of income, expenses, and financial goals.
We will use this information to determine your borrowing capacity accurately.
5.2. Access to Multiple Lenders:
As independent experts, Clark Finance Group has access to a wide network of lenders, including banks, industry-preferred lenders, and non-bank lenders.
We shall always compare loan products from various institutions to find the best fit for your needs, therefore maximising your borrowing capacity.
5.3. Negotiation and Application Support:
Clark Finance Group will negotiate with lenders on your behalf, striving to secure competitive interest rates and favorable loan terms.
We also assist with preparing and submitting your loan application, liaising with all parties and streamlining the process.
5.4. Continuous Support and Guidance:
We become a team with our clients and pride ourselves on providing ongoing support, answering your questions and ensuring you understand each step of the journey and for the life of your loan.
By understanding the factors that influence it and implementing strategies to maximize it, you can achieve success with your borrowing capacity, and you can confidently pursue the property of your dreams.
At Clark Finance Group, our experienced mortgage brokers and support team are here to guide you through the process, help you calculate your borrowing capacity, and secure the right home loan for your needs.
If you are interested in knowing more about your borrowing capacity, then reach out to us and speak to a Lending Specialist on 1300 366 670 or book a free online consultation using: https://clarkfinancegroup.com.au/online-consultation/