Home Loan Borrowing Power: How to Calculate Your Borrowing Capacity
“How much can I borrow?” It’s one of the most important questions for a first home buyer, but it’s difficult to get an accurate answer. Why? Because borrowing power has changed dramatically over the past few years. According to Loanscape, a family that could have borrowed $785,000 in June 2021 would only be able to borrow $583,500 in March 2023. So, how can you get an accurate assessment of your borrowing capacity?
What is Borrowing Power or Borrowing Capacity?
Your borrowing capacity is the maximum amount of money a lender will be willing to loan you. The borrowing power of an individual will be determined by factors including income, credit history, expenses, current interest rates and personal debt.
Now, why is calculating borrowing capacity so important? Because until you know how much you can borrow, you won’t know how much you can spend. An accurate estimate of your borrowing power will help you set a realistic budget for your property purchase. It will also help you assess your future obligations to ensure you can manage your monthly repayments.
How Much Can I Borrow?
When considering how much you can borrow, you’ll need to include:
- Current income and employment stability
- Existing financial commitments (loans, credit cards, living expenses, HECS-HELP debt, etc.)
- Credit history
- Length of the loan term
- Current interest rates
- Size of your deposit
- Type of loan (fixed-rate or variable-rate)
- Government lending standards and restrictions
These factors will help establish your debt-to-income ratio, a metric that lenders use to assess your overall “financial health”. The ratio is calculated by dividing your total monthly debt repayments by your gross monthly income (expressed as a percentage). The lower your ratio, the more you’ll be able to borrow.
Using A Borrowing Power Calculator
An online borrowing power calculator can be handy for estimating how much you can borrow. It allows you to input basic details, such as whether it’s a joint application, number of dependents, interest rate, loan term, net income, average expenses and your credit limit. The calculators then use this information to estimate your borrowing capacity.
While this can be a useful gauge when initially considering your options, the information provided by an online borrowing power calculator is general only. It won’t take all of your circumstances into consideration. When it comes to seriously calculating your borrowing power, talk to a mortgage broker.
Common Mistakes to Avoid When Calculating Borrowing Capacity
- Miscalculating living expenses: Make sure you provide an honest and thorough assessment. Consider all aspects, including entertainment, utilities and discretionary spending.
- Overlooking existing debts: Don’t forget to report any outstanding debts. Lenders will include all of your existing financial obligations in their calculation.
- Having poor credit: A poor credit report will hurt your borrowing capacity. Take steps in advance to improve your credit score.
- Only using online borrowing power calculators: Remember, these are a guide, not an offer from a lender. When calculating borrowing capacity, talk to a broker.
How Much Can I Borrow? A Case Study
Sarah is planning to buy her first home. She has a solid income, but her borrowing capacity is also determined by her car loan and monthly expenses. Sarah’s careful budgeting increases her borrowing power, but her credit score is low (thanks to a few missed car payments).
By improving her credit score, Sarah will gain better loan terms and increase her power. Understanding and optimising these factors in advance will significantly help Sarah on her journey to homeownership.
A Broker Can Help Calculate Your Borrowing Power
“How much can I borrow?” It’s an important question. Calculating borrowing power will help you establish a realistic budget and make plans for the future. But it can be difficult to figure this out on your own. At North Brisbane Home Loans, we’re committed to helping first home buyers achieve their home ownership goals.
Our online calculators can point you in the right direction, but remember, they’re only a guide. For an accurate assessment of your borrowing capacity, book an appointment with North Brisbane Home Loans.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
