Understanding your borrowing power is the key to making informed financial decisions.
Buying a home is a big step, and understanding how much you can borrow is crucial.
Your borrowing power depends on several factors, including your income, expenses, credit history, and the value of the property you're interested in.
Understanding how borrowing power works can help you make smart decisions and improve your chances of getting the loan you want.
1. What affects how much you can borrow?
Your income and job stability
The more stable and consistent your income, the better. Banks love to see a solid job history and reliable earnings. Lenders assess your income to determine if you can comfortably repay a loan. This includes considering your salary, bonuses, and any additional income streams. They also look at your job stability—having a steady role with consistent earnings improves your chances of securing a loan.
For a deeper dive into how lenders evaluate income and employment, visit ASIC’s Moneysmart guide.
Debts and other financial commitments
Got a credit card, car loan, or personal loan? These debts reduce how much a bank is willing to lend you.
Lenders use something called a debt-to-income ratio to decide how much debt is too much. Responsible lending laws are designed to protect borrowers and ensure that loans are only given to those who can afford them.
This means lenders must assess your financial situation, verify your income, and ensure you're not taking on excessive debt.
If you want to understand your rights and obligations as a borrower, take a look at the National Consumer Credit Protection Act.
Your credit score
A good credit score tells lenders you’re responsible with money. A poor score? Not so great. It can limit your borrowing power. Lenders use your credit score to assess how responsible you are with credit.
A higher score can open doors to better loan terms, while a lower score may limit your options.
You can improve your score by making timely payments, reducing outstanding debt, and avoiding unnecessary credit applications. Learn more about managing your credit score at Moneysmart.
Loan-to-value ratio (LVR)
This is how much you’re borrowing compared to the property’s value. The lower the percentage, the better deal you’ll get.
For example, if you're borrowing $400,000 for a $500,000 home, your LVR is 80%. If you’re struggling to save for a big deposit, you might still be able to buy a home through low-deposit loan programs. These programs help eligible buyers enter the property market with a smaller upfront investment.
In Western Australia, Keystart Loans, a Western Australian government initiative, provides low-deposit home loans for first-home buyers and those who may not meet the standard lending criteria of major banks. Their loans aim to help more people enter the property market without needing lenders mortgage insurance (LMI).
Interest rates
Higher interest rates mean bigger repayments, which can lower the amount you can borrow. Lenders need to ensure that you can continue making repayments even if interest rates rise.
That’s why they assess your loan application using higher interest rate assumptions, known as serviceability buffers. These measures help prevent borrowers from overextending themselves.
The Australian Prudential Regulation Authority (APRA), the national financial regulator, oversees banks and lenders to ensure they follow responsible lending practices and maintain financial stability. APRA sets lending guidelines, including serviceability buffers, to help protect borrowers from financial stress.
2. How to work out your borrowing power
Banks and lenders use a serviceability assessment to see if you can afford repayments.
They consider your income, expenses, and even possible interest rate hikes.
Curious about how much you could borrow?
Lenders use a range of factors, including your income, expenses, and financial commitments, to calculate your borrowing capacity.
A quick and easy way to estimate your loan potential is by using an online calculator.
Try Moneysmart’s Borrowing Power Calculator to get a rough idea of your loan eligibility and plan your next steps accordingly.
3. How to increase your borrowing capacity
Clear some debt: The less you owe elsewhere, the more you can borrow for your home.
Boost your credit score: Check your credit report and fix any issues.
Save a bigger deposit: A higher deposit means a lower LVR, which can get you a better deal and help you avoid lenders mortgage insurance (LMI).
Stay in your job: A stable employment history makes you look more reliable to lenders.
4. Get expert advice from Aspire2Wealth
Aspire2Wealth also provides financial planning insights for first-time home buyers. If you're looking for ways to financially prepare for your home purchase, check out our article on Financial Planning Tips for First-Time Home Buyers in Australia.
If you’re looking for tailored mortgage advice, Aspire2Wealth can help. Our Mortgage and Finance Team works with over 50 lenders to find the right loan for you. Whether you’re a first-home buyer, refinancing, or looking for an investment loan, our team can guide you through the process. Learn more about our mortgage services and how our team can assist you in finding the right loan solution. At Aspire2Wealth, we have a dedicated Mortgage and Finance Team with access to more than 50 lenders, ensuring you get the best loan tailored to your needs. You can easily book a consultation to get started on your mortgage journey.
Sources:
Aspire2 Wealth Advisers Pty Ltd ABN 42 125 897 903 is an authorised representative and credit representative of Charter Financial Planning Limited ABN 35 002 976 294, AFSL and Australian Credit Licence No. 234665.
This website contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. and credit representative of Charter Financial Planning Limited ABN 35 002 976 294, AFSL and Australian Credit Licence No. 234665.
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