Borrowing Power 101: How much can you borrow for your home loan?

Improve your borrowing capacity, get the right loan and secure your dream home by understanding how much you can borrow for your home loan.
joseph@itssimple.com.au

joseph@itssimple.com.au

December 23, 2022

Before purchasing a property, one of the most important questions you ask yourself is how much you can borrow for your home loan. Your borrowing power determines how much a bank or lender is willing to loan you. So, understanding this can help you assess your situation and decide what properties to look at.

In this article, we break down what borrowing power is, the factors that affect it and how you can maximise it to help you achieve your dream home.

What is borrowing power?

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Borrowing power refers to how much you can borrow from a bank or lender. It is affected by several factors, including your financial situation, employment, the type of loan, the lender you choose and the RBA cash rate.

Knowing your borrowing power is an important step before taking out a home loan because it impacts the terms and conditions of the loan and the cost of borrowing. Lenders use your borrowing power to assess the risk of lending money to you.

This means that, if you’re a low-risk borrower, you tend to have a high borrowing capacity and a greater chance of getting your home loan application approved. Having a high borrowing power is beneficial when taking out a home loan because it gives you an edge to secure a larger loan, negotiate better terms and get a lower interest rate.

On the other hand, if you’re a high-risk borrower, lenders may give you a lower borrowing power to balance the increased risk. Because of this, it may limit your options and result in higher interest rates and less favourable terms.

How do banks calculate your borrowing power?

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Use our borrowing power calculator to find out how much you may be able to borrow for a home loan. This takes into account your cost of living and expenses. However, keep in mind that the calculator doesn’t include all fees and charges and that the maximum amount is subject to change.

If you want to know your exact borrowing power, you can reach out to It’s Simple’s mortgage brokers to help you evaluate your financial position and find the loan that matches your situation.

What affects borrowing power?

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When lenders estimate how much you can potentially borrow, they consider various things, like your deposit, savings and assets, income and expenses, credit history and more:

Deposit

Your deposit is the amount you put as a down payment for your home loan. Typically, you should deposit at least 20% of the property’s purchase price. Some accept low deposits depending on your circumstance and eligibility, but you may pay Lenders Mortgage Insurance (LMI).

A larger deposit means less money you need to borrow, so this limits the risk that lenders take for loaning you money. Since lenders consider the amount you deposit, a higher deposit may help you get a higher borrowing power.

Savings and assets

Lenders will also consider any assets you own, such as properties, cars, stocks, bonds or mutual funds and other investments. Having a significant number of assets can make you appear less risky to lenders since these can be used as collateral in case you fail to meet your repayments.

Aside from your assets, lenders will also look at your genuine savings to assess your financial discipline. This demonstrates your ability to manage and meet your home loan repayments, so good savings habits can show you’re a good borrower.

Employment and income

Lenders will evaluate your capacity to borrow based on your income and source of income. In general, good income indicates you can afford to meet your mortgage repayments, and stable employment shows you can maintain your repayments over the life of the loan.

Credit history

Another crucial aspect that lenders review is your credit history. They will assess your credit score, including your past debts, repayment history and credit applications, to determine your risk as a borrower.

If you have a good credit history, this can positively impact your borrowing power as this indicates you’re a reliable borrower. However, bad credit can limit how much they will be willing to lend you.

Living expenses 

As lenders assess your income, savings and credit, they also consider your living expenses. This includes any payments to your current home, utility bills, food and other financial commitments. Lenders want to know how much of your budget would be left to cover your home loan after factoring in your day-to-day expenses.

Debts

Any existing debts you have can also impact your borrowing power. Apart from your debts, lenders also review your credit limits as potential loans even if you’ve paid off your credit card. This means that having multiple credit cards can lower how much you can borrow.

Type of loan and interest rate

Your borrowing capacity also depends on the type and term of the loan and its interest rate. Securing a loan with a low interest rate and a longer loan term means you have lower repayments. In turn, you may be able to borrow more.

If you’re looking for an investment property loan, lenders may also evaluate the potential income or expenses you may incur.

Value of the property

Another factor to consider is lenders may also request a valuation of the property to determine how much they can lend you. This is to ensure that the property isn’t overvalued or undervalued.

How to increase your borrowing power?

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While several factors affect your borrowing power, you can take certain steps to improve it over time:

Improve your credit score

One of the most effective ways to increase your borrowing capacity and secure you a better deal is by getting a higher credit score. To improve your credit score, you should understand your circumstance to make careful plans, pay your bills on time, reduce your credit card balances and look for errors in your credit report.

Reduce your debt

If you have outstanding loan balances, such as car, credit card and personal loans, paying down as much debt as you can will help you boost your borrowing power. This can work in your favour because this can also improve your credit score.

Reduce your expenses

By reducing your expenses, you can free up your budget, save more for the deposit and increase your borrowing capacity. This involves cutting back on unnecessary spending, shopping for cheaper options and prioritising paying off your loans. So, it’s worthwhile to check any subscriptions you can cancel or hold off major expenses until you’re in a better position.

Cut back on credit limits

Since lenders consider your credit limit as potential debt, another way to ramp up your borrowing power is to lower credit card limits or consider getting rid of credit cards that you’re not using.

Build your savings and assets

If you can prove you are financially responsible, showing good savings habits can also increase how much lenders are willing to let you borrow. To do this, you must commit to opening an account dedicated to your monthly savings. It will take time, but this gives you a leg up to get the home loan you deserve.

Save for a larger down payment

Having a larger deposit reduces the amount you need to borrow and increases your borrowing power. This can also help you qualify for a larger loan amount and a lower interest rate and improve your chances of getting approved. You can use our home loan calculators to estimate your loan repayments and stamp duty.

Earn more income

While it’s not easy, increasing your income shows your capability to meet your repayments. So, having a stable job and more income can improve your borrowing power. You may want to get a side hustle, negotiate a raise or take extra shifts.

Stretch loan terms

Choosing a longer loan term can raise how much you can borrow. For instance, a 30-year mortgage may appear less risky compared to a 20-year mortgage, so you may get better borrowing power. However, the trade-off is that you may pay more interest over the life of the loan.

To counter this, you may refinance your home loan later to a shorter term or make extra repayments if you can when your financial situation improves and when refinancing benefits you more.

Choose the right loan and lender

Since the market is competitive, and your borrowing power varies per lender, shopping around can help you find the one that matches your needs. This is where mortgage brokers can help you best.

For example, if you’re a first home buyer and have saved a low deposit, brokers can help you find possible grants and schemes and the right lender that can service you best and offer you a higher borrowing capacity based on your situation.

To further help you, here’s It’s Simple’s managing director, Joseph Daoud to share his tips on how you can boost your borrowing power:

Does a guarantor increase your borrowing power?

Having a guarantor can help you borrow 95% of the property’s purchase price or even more in some cases. A guarantor, usually the parents, is someone who agrees to put up a portion of their property’s equity as security for your home loan.

For example, if you want to purchase a property worth $500,000 and only have $25,000, your loan-to-value ratio (LVR) is 95%. This means you need to pay LMI if your loan is approved. However, having a guarantor can help you reduce your LVR and avoid paying LMI.

Being a guarantor is a risky choice, so it’s best to consult with experts and make careful considerations.

How much can I borrow?

Borrowing power is an important factor to consider when you apply for a home loan in Australia. Understanding the factors that affect it can help you improve your borrowing capacity and make informed financial decisions to get a desirable offer and increase your chances of getting approved.

To prepare and control your finance, get in touch with our mortgage brokers to get expert help from the start and beyond. It’s Simple will help you break down your options, enjoy tailored choices from the top 40+ banks and lenders in Australia and help you choose and apply for the right loan solutions that match your goals and needs.

You can email us today at info@itssimple.com.au or book a free expert consultation at your preferred schedule.

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