Determining Your Borrowing Power

You’ve spent years sacrificing life’s little luxuries and have set strict household budgets that you’ve somehow managed to uphold. Now, all your hard work has led you to the homeowner’s starting line: you’ve finally saved the deposit to purchase a home.


But now comes the next part – figuring out what you can actually afford.


Determining your borrowing power is a fundamental step to buying your home, and knowing how you can strengthen your borrowing capacity can push you further towards stepping foot into the doors of your dream home.


What is it?

Your borrowing power – or borrowing capacity – refers to the amount of money that you can safely and comfortably afford to borrow and repay. It’s calculated by taking a number of personal factors into consideration, including:

  • your personal situation: the number of applicants and number of dependent children

  • net household income: your income, your partner’s income, government payments, dividends

  • financial obligations: existing loan repayments, living expenses, credit card limits and;

  • assets: shares & managed funds, existing properties, savings, superannuation, home contents, motor vehicles


How do I find out what mine is?

A good starting point for those beginning to consider their first mortgage, considering an upgrade or even those looking to refinance for an investment property, is to try out the many online tools that can provide you with an estimate of your borrowing capacity. Most lenders will have calculators available online that will get the job done quickly and easily.


Whilst these are great tools to get you started, it’s important to keep in mind that when it comes to home loans, responsible lenders will look at each individual application thoroughly to ensure your application adheres to their lending criteria. This means that results from these calculators won’t always provide an accurate estimate so be mindful to take these calculations as a guide.


How do I improve my borrowing power?

Reduce your available credit

Many of us may have large unused credit limits on one or more credit cards, tucked away for a rainy day. However, most are unaware that this unused line of credit is considered in the loan assessment process and seen as a liability when applying for a home loan. Reducing your credit limits will, therefore, decrease the liabilities attached to your application.


Reduce your expenses

If you’re applying for a loan on your own, try and reduce your expenses by cutting out those unnecessary luxuries. Unused gym memberships or monthly spa treats are just a couple of things that come to mind. 


Claim all your income

This may seem like a strange tip, but unclaimed income – including income received from cash jobs – can drastically decrease your borrowing power. In addition to recent payslips, lenders will look at your taxes over the past couple of years to verify other income, such as overtime and bonuses. These figures combine to determine how much you can borrow and the more income you claim on your taxes, the higher your serviceability and the more desirable you become to lenders.