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Looking to buy a property of your very own? Whether it’s an investment or a new home, you might be wondering how much you’ll be able to spend as a first-home buyer - in other words, your borrowing power.
Here, we break down precisely what borrowing power is, how it’s calculated and, if it’s not where you want it to be, how you can try and increase it.
What is borrowing power?
Put simply, borrowing power is the amount of money a home buyer can loan from lenders or banks to buy a property.
You may also hear it referred to as ‘borrowing capacity’, but both terms are interchangeable.
How do home loan lenders assess borrowing capacity?
Banks and lenders are focused on ensuring that your repayments are affordable, and so your borrowing capacity is linked to your current financial circumstances. In all cases where a loan is being provided, the lender will need to be confident that you can pay it off.
When figuring out your borrowing capacity, they’ll look at a number of factors. These might include:
- How many people are applying for the mortgage
- The size of your deposit
- Your income, including your salary or business earnings if you’re self-employed, and passive income streams like share dividends and rental returns
- How much you have in genuine savings and your ability to cover upfront fees, such as stamp duty
- Your assets, including other properties
- Your living expenses, like utilities, insurance, groceries and school fees
- How many financial dependants you have
- Your credit score
- Any outstanding loans, like car loans, credit card debt or student debt, and your repayments
- Your combined credit card limits, the outstanding balance and your minimum repayments
- Any other financial commitments
Most lenders will also evaluate your borrowing power based on the loan term (the length of the loan) and the type of loan you want.
For example, they may offer a higher loan amount if you’re repaying it over a longer term because your home loan repayments will be smaller. And if you go for a variable interest rate loan over a fixed rate loan, they’ll include a buffer (in Australia, typically about 3% higher than the rate they offer).
However, every bank and lender has its own assessment rate for estimating your borrowing power, which is why your borrowing power can vary between different lenders. This rate is usually based on their individual risk appetite and lending criteria.
How can I find out my borrowing power?
To get a rough idea of your borrowing capacity, you can use an online borrowing power calculator. You’ll need to plug in your income, expenses and other information that affects your finances.
Learn your borrowing power with the OwnHome borrowing power calculator.
If you’re ready to start looking for properties, you can also apply for home loan pre-approval. This means a lender has assessed your financial situation and given you an indication of how much you can spend – but it hasn’t yet been formalised.
What does it mean if my borrowing capacity is low?
If a lender isn’t quite willing to lend as much as you expected, you might wonder why.
There may be several factors at play. Some of the most common reasons borrowing capacity is low include expenses that outweigh income, too much outstanding debt, missed repayments, a poor credit rating or unsatisfactory money management.
Your deposit might also be relatively small compared to the property's price, resulting in a high loan-to-value ratio (LVR). Your LVR is the amount you’ll need to borrow as a percentage of the property value. Most lenders consider an LVR of more than 80% to be a risk, as your monthly repayments will be much higher.
And that’s not to mention that you generally need to take out lenders mortgage insurance (LMI) with a deposit of less than 20% of the purchase price – which only adds to your expenses.
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How do I increase my borrowing power?
With that in mind, here’s how you can work to improve your borrowing capacity.
Boost your deposit
Your deposit is one of the main influences on your borrowing power. This is because a larger deposit means higher borrowing capacity, lower interest on your home loan and smaller repayments.
Lenders also like to see that you can save, as it demonstrates your ability to put money away to service your loan.
Increase your income
Lenders want to gauge your capacity to make monthly mortgage repayments, and your income will likely be the primary way of servicing these.
When you’re filling out your application, make sure you don’t forget about all your income sources. These include dividends, rental income if you already own an investment property, side hustles, government payments and child support.
If the money coming in still isn’t enough, there are numerous ways to up your income. You could chat to your manager about a pay rise, increase your hours if you’re part-time, hunt for a new and better-paying job, or consider a supplementary income stream.
Decrease your expenses
If a lender is concerned that your expenses are too high, they may reduce your borrowing capacity. Luckily, there are numerous ways to curb spending.
Look at your bills and see if you can get better deals on energy, phone and internet elsewhere. Assess your spending habits and consider where you can cut back – like shopping for clothes and dining out. You could also suspend some subscriptions and memberships to reduce your outgoings.
Bonus: You may save a bit of money, which could go directly towards bumping up your deposit.
Lower your debts
You could also use that extra money to pay off or reduce some of your debts, such as personal loans, car loans or student debt.
With fewer or lower outstanding debts, lenders will see that you have more money to service your mortgage – and may potentially increase your borrowing power as a result.
Build a better credit score
Your credit report (or credit history) records how much money you’ve borrowed, how many credit applications you’ve made, any refinancing of debts, and your ability to make timely repayments.
In turn, your credit score (also known as your credit rating) is a number based on data in your credit report. The higher the number, the more likely you are to pay back the money on time and the less risky you are to lenders.
Check your credit score online and if it’s low, do what you can to improve it. You’ll find out everything you need to know about repairing your credit score here.
If you want further advice, chat with a mortgage broker about your loan options. They can help you find the right home loan product to best suit your needs and financial situation.
