When it comes to working out how much you can borrow, there are actually a lot of factors at play. If you have spoken to a broker or looked at an online calculator to see what you can borrow and have found it’s less than you thought, there are some things you can do.
Assessing your borrowing capacity (how much you can borrow)
First, let’s look at what lenders assess your borrowing power on:
- Many people think borrowing power is based only on income. Whilst it is a big factor, it’s not the only one.
- How much existing debt you have and your associated repayments is also considered. Some lenders may look at your DTI ratio when deciding how much you can borrow.
- Credit cards. The bank looks at your overall limit and not just the amount owing. For example if you have a $20K credit card limit then the bank assesses you based on the $20K, even if you only owe $500 on it.
- Living expenses. How much you spend each month/quarter/year.
- Assessment rate. Lenders all add at least 1.5 per cent to the repayment interest rate as a buffer in case rates go up, some lenders add even more.
- Credit Score. This comes into effect later the process but can have an impact on the lender and interest rate available to you.
- Some lenders offer different interest rates depending on how much you are borrowing. This is a bit of a circular issue, if you want to borrow more the rate goes up which affects how much they will let you borrow. Ideally you want to have a 20% deposit and an LVR of 80% or less.
- Risk appetite. Some lenders are happy to take on more risk than others, meaning they will happily lend more to you than a more conservative lender. Checking your borrowing power across a few lenders is something your broker may do.
Ways to boost your borrowing power
Knowing what the lenders are assessing you on helps you to understand how you can increase what they will lend to you. Here are Vincent Moore’s top ways of improving your borrowing power:
- Reduce debt is the best one. Reducing credit card limits is such an easy one to do (and can often cost nothing) or paying out a loan with not much owing but with huge repayments can increase capacity hugely.
- Increase income. Much harder – asking your boss for a pay-rise is not always easy. Some people look at side hustles which can be a good option although is not for everyone. If you establish a side, most banks need to see two years’ proof of income before they will use it. So this isn’t going to be a quick solution.
- Buy with a partner. This might seem silly but purchasing with a partner is often a good solution. It’s obviously not for everyone but it’s best for some clients to wait until they are in a position where they are comfortable to buy with a partner as it might double (or more) their borrowing capacity.
- Reduce living expenses. If someone’s living expenses are very high, then reducing these over a couple of months could allow them to borrow significantly more. Ways you can reduce expenses include things like asking for a lower premium on your insurance (home/car/health) or swapping energy providers to a lower cost option. You can also save money with rewards points and programs. Eating out less is another easy win for lots of people as is deleting food delivery apps from your phone to take away the temptation.
It’s important to borrow within your limits and you don’t find yourself in a position where you can’t repay your debt, this is why borrowing capacity exists in the first place. We’re in no way suggesting you should attempt to borrow more than you can afford to repay. Having a budget and sticking to it is a great way of staying on top of your finances.
Ready to look at how much you can borrow?