Reckon you’re ready to take out a home loan? Whether you’re refinancing an existing loan for your current home or buying your first (or next) home, you might want to first determine how much you can borrow. This is known as your borrowing power.
So, knowing your borrowing capacity can save you a lot of time particularly when you’re keen on a specific property or postcode, even if it comes at the cost of missing out; which plucky first home homebuyer hasn’t fallen in love with a property only to discover that it’s completely beyond their means?
We’ll take you through what borrowing power is, the factors that can influence it and how you could potentially go about improving it.
Confused by the concept of borrowing power? Luckily for you, Selling Houses Australia host, Andrew Winter, is here to help explain.
Want to know how much you could potentially borrow to put towards your home loan? Calculate now.
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Your borrowing power is the amount of money a lender might potentially lend you based on your unique financial situation. Borrowing power is generally calculated based on your regular income and living expenses, plus a few other factors.
These tend to include, but aren’t limited to:
Borrowing power is generally a more helpful yardstick than deposit size alone for prospective homebuyers. For example, you could have a $1 million deposit saved up, but that doesn’t mean you could afford to meet the interest repayments on a multi-million-dollar home loan.
Whereas borrowing power explicitly ballparks the amount you could potentially borrow, and the property values you could potentially afford based on how much you can afford to repay.
As we’ve mentioned, there are many different factors that can influence the amount of money a lender is willing to let you borrow. However, there are a few notable exceptions, including:
Many things can affect your borrowing power, so it may be worth going over some of the lesser-known factors that could have an impact on your borrowing power. These include:
You can generally increase your borrowing power by considering the factors that influence it and working on them individually. While some of these changes may not make an immediate difference, the impact on your borrowing power may prove greater than the sum of its parts over time.
Some steps you could take to increase your borrowing power include:
Your interest rate will influence the overall size of your ongoing repayments, making it one of the more important variables at play when calculating your borrowing power.
However, there is a second, indirect way in which a home loan’s interest rate can affect your borrowing power, and even your overall eligibility for any given home loan.
The Australian Prudential Regulation Authority (APRA) expects lenders to factor in something called a ‘serviceability buffer’ when assessing each and every home loan application they receive. The current minimum interest rate serviceability buffer is three percentage points, which means that lenders risk breaching their compliance requirements if they approve a home loan that the applicant can’t afford to repay a rate increase of three percentage points.¹
This measure is in place to protect borrowers against significant interest rate hikes, but it can cause a lot of headaches if you’re unaware of it and trying to get approval for a home loan.
So, keep that extra 3% in mind when you’re thinking about borrowing power. A certain home loan product may seem within your means based on your desired loan amount, but what if its advertised rate was 3% higher? Our home loan comparison tool will take this buffer into account when calculating your borrowing power.
N.B.: While we can provide you with an approximate idea of how much you may be able to afford to borrow, it should only be taken as a guide rather than a formal pre-qualification, as our borrowing power calculations don’t reflect the individual and varying serviceability standards of each lender.
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.
Are you ready to take the next step on your journey towards homeownership? Then give our home loan comparison tool a go; it’s free to use, and it’ll only take minutes to compare a wide range of Australian lenders, interest rates and repayment amounts. Simples!
