What determines your home loan borrowing power?

When you’re looking to purchase property, one of the first things you should figure out is your ‘borrowing power’. Knowing how much you can potentially borrow will help you search for properties that meet your budget.

In this guide, we’ll explore how to calculate your borrowing power and what lenders look for to determine how big of a home loan they’ll offer you.

Borrowing power is the amount of money a bank will be comfortable lending you based on your financial situation. The higher your borrowing power, the more expensive a property you can afford.

So when considering a home, be aware that having a large deposit or owning a few assets won’t secure your home loan. There are a few things to think about in addition. Let’s have a look.

How much you can borrow varies from lender to lender, but most banks look at the same factors to calculate your borrowing power. 

We’ve highlighted the major ones below:

Income

A key factor is your income. The amount you earn impacts how much you can afford in mortgage repayments. Of course, if you’re buying a property with a partner or friend, your combined income will allow you to take out a larger loan.

Typically, the higher your income, the less risk you pose in a bank's eyes.

Debts and living expenses when applying for a loan

Lenders will pass a fine-tooth comb through your ‘accounts’ to check if you’re financially responsible. So it's important to avoid having big debts or falling behind on any repayments. 

Debt can impact your ability to make future repayments, and may reduce your total borrowing power. By the same token, high living expenses might also decrease your borrowing capacity or cause your loan application to be denied.

Some debt and expenses lenders look at include:

• Credit card usage
  
• Shopping habits
  
• Outstanding debts or loans like a car loan
  
• Ongoing financial commitments like phone bills, school fees or subscriptions.

Credit history impacts loan applications

Your credit history and rating will give lenders an idea of how reliable you are with repayments. One of the key things they search for is if your file has any information about missed or late payments–whether it be bills, credit card repayments or another loan.

That’s why it’s wise to get a copy of your credit file before applying for a home loan. The better your credit score, the higher your chances of approval.

Initial deposit - how much can you afford?

The size of your deposit can impact the size of loan you receive. 

Lenders look for evidence of genuine savings, so having a generous initial deposit (at least 20%) could help increase your borrowing power. 

Your deposit will also help define your loan-to-value ratio, which will determine how much you can borrow overall. Generally, most lenders prefer a 20% deposit (leaving 80% of the value to pay off) and consider an LVR that tips over 80% to be more risky. If your LVR is higher than 80%, you may need to pay for Lenders Mortgage Insurance.

Assets can help borrow a home loan

Assets like a car, boat, investment properties or a share portfolio may also help increase how much you borrow. That’s because these high value assets prove to the lender that you can save and invest money over a long period of time. 

However, keep in mind that lots of debts from these assets could decrease your borrowing capability.

Value of the property

How much you can borrow may depend on the property value. First, a lender will conduct a property valuation and then decide how much money it will lend you. If the property costs more than you can reasonably afford, there is a chance that your application will be declined.

A home loan borrowing calculator can give you an insight into what you can borrow based on your current finances. Remember that the number you get from the calculator is an estimate, not a guarantee. 

If you’re looking to get into the property market soon, check out Mozo’s home loan guides and tips. Alternatively, start comparing home loans below.