Understanding your borrowing capacity is crucial when applying for a home loan. This figure determines how much money lenders are willing to offer based on your financial situation, and it directly impacts your ability to purchase the property you want.
What Is Borrowing Capacity?
Borrowing capacity refers to the maximum loan amount a lender will approve based on your income, expenses, debts, and financial commitments. When you apply for a home loan, lenders assess multiple factors to determine this figure, including your ability to service the loan repayments while maintaining your current lifestyle.
Lenders typically use a loan to value ratio (LVR) of up to 80% without requiring lenders mortgage insurance (LMI). If you're borrowing more than 80% of the property's value, you'll need to pay LMI, which protects the lender if you default on your loan.
Key Factors That Affect Your Borrowing Capacity
Several elements influence how much you can borrow:
• Income stability and amount: Regular employment with consistent income strengthens your application
• Existing debts: Credit cards, personal loans, and other commitments reduce your borrowing power
• Living expenses: Your monthly spending habits affect how much you can allocate to loan repayments
• Credit history: A clean credit record demonstrates responsible financial behaviour
• Deposit size: A larger deposit reduces the LVR and may eliminate LMI requirements
Strategies to Increase Your Borrowing Power
Reduce Existing Debts
Paying down credit cards and other loans before buying a home can significantly increase your borrowing capacity. Even reducing credit card limits shows lenders you're managing your finances responsibly.
Improve Your Credit Score
Ensure all bills are paid on time and avoid multiple credit applications within short periods. Your banks statements and credit history provide lenders with insight into your financial reliability.
Increase Your Deposit
A larger deposit not only reduces the loan amount but may also help you secure interest rate discounts from lenders. Consider saving additional funds or exploring options like accessing home equity from existing properties.
Document All Income Sources
Include all regular income when applying for a home loan, such as rental income, bonuses, and overtime payments. Proper documentation strengthens your Home Loan application.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at Empire Road Investments today.
Understanding Interest Rates and Loan Types
When exploring Home Loan options, you'll encounter different interest rate structures:
Fixed Interest Rate Home Loans
A fixed interest rate home loan provides certainty with consistent repayments over a set period. This option helps with budgeting and protects against interest rate increases.
Variable Home Loan Rates
Variable interest rates fluctuate with market conditions. While payments may increase or decrease, variable loans often offer features like offset accounts and additional repayment options.
The Application Process and Pre-Approval
Getting pre-approved provides clarity on your borrowing capacity before you start house hunting. The streamlined application process involves:
- Gathering financial documents including banks statements and income proof
- Completing the Home Loan application
- Undergoing lender assessment
- Receiving Home Loan pre-approval with specified loan amount
Pre-approval gives you confidence in the property market and demonstrates serious intent to vendors.
Additional Costs to Consider
When calculating home loan repayments, factor in additional expenses:
• Stamp duty (varies by state)
• Legal fees and conveyancing
• Building and pest inspections
• Ongoing costs like council rates and insurance
These costs affect your overall financial situation and may impact your available deposit.
Working with Mortgage Brokers
Mortgage brokers can access Home Loan options from banks and lenders across Australia, potentially finding more suitable products than approaching individual lenders directly. They understand different lenders' criteria and can match your circumstances with appropriate loan products.
Brokers can also help optimise your application by:
• Structuring your finances to maximise borrowing capacity
• Identifying lenders likely to approve your application
• Explaining different loan features like offset accounts
• Assisting with refinancing options if your situation changes
Whether you're a first home buyer or looking at investment loans, professional guidance can help you access better home loan interest rates and terms.
Maximising your borrowing capacity requires careful planning and understanding of lender requirements. By improving your financial position, choosing the right loan structure, and working with experienced professionals, you can position yourself for successful property purchase.
Call one of our team or book an appointment at a time that works for you to discuss your home loan options and discover how we can help increase your borrowing capacity.