What is my borrowing power?
Your borrowing power is the amount of money you may be able to borrow from a lender. It is based on your financial situation including how much you earn, your expenses, your existing debts and the size of your deposit.
What affects my borrowing power?
There are a range of factors that can affect your borrowing power, including your income, your expenses, your existing debts, your deposit and your credit score.
Your credit score
Your credit score is based on your personal and financial information, including what credit and loan products you have and your repayment history. If you have a high credit score, this can increase your borrowing power.
Your income
Lenders look at your income to help work out how much you could afford to repay. As a general rule, the more income you earn vs your expenses, the greater your borrowing power may be.
Your assets
Having existing assets, such as a car, investment properties or shares may improve your borrowing power as it may demonstrate your ability to save and invest over time.
Your expenses
This includes things like rent, utility bills and how much you spend on groceries. If you have children or other dependants, your lender will also factor this in. If your expenses are high compared to your income, this will generally lower your borrowing power.
Your spending habits
Some lenders may look closely at your spending habits to see whether you can afford to meet loan repayments. This may include scrutinising what you spend your money on, such as takeaway orders, online betting and streaming subscriptions, and how you pay for those items or services, such as whether you take money out of your savings or use smaller loans or buy now, pay later schemes. The more careful you are with how and what you spend your money on, the greater your borrowing power may be.
Your existing debts
Any debts you have (such as credit cards and personal loans) can also affect your borrowing power. Lenders will typically take into account the maximum credit limit on any credit card, even if you don’t use all of it. If you have a lot of debt, this may lower your borrowing power.
Your deposit
The bigger your deposit is, the better your borrowing power typically is. Lenders will look at the size of your deposit in comparison to the property you want to buy. This is known as the loan-to-value-ratio (LVR). Bear in mind that if you have less than a 20% deposit, you will typically need to pay lender’s mortgage insurance (LMI).
Lenders will also look at your savings history. If you can show a history of genuine savings over time, this can help to demonstrate that you can make future home loan repayments.
If you are applying for a home loan by yourself or with others
If you apply for a home loan with your partner, friend or relative, you and that person’s credit history and financial situation will both be put under the microscope by lenders. With that in mind, it may be a good idea to do a full assessment of both your financials and if you find that your partner, friend or relative’s credit or debt issues may affect your borrowing power, you may want to consider applying for the loan by yourself.
How can I increase my borrowing power?
If you’ve calculated your borrowing power and it’s not as high as you’d like, there are some steps you can take that may help increase it:
Pay down debts – if you have existing debts like credit cards and personal loans, try to pay these down as much as you can. If you have any credit cards that you don’t use, consider cancelling them.
Reduce your credit limit – lenders consider your maximum credit limit, so you may want to lower this if you can.
Cut down expenses – take a look at your spending and see if there is anywhere you could cut back costs. You might also like to compare your electricity, gas and internet prices to see if you can get a better deal for your circumstances.
Build up a good savings history – try to develop evidence of a regular savings history before you apply for a home loan. This can help to show that you are disciplined enough to meet future loan repayments.
Check your credit score – it’s a good idea to check your credit score regularly, so you know where you stand as a borrower. You can check your credit score for free with Canstar.
Other ways to potentially increase your borrowing power include borrowing with someone else (such as a partner), getting a family member to go guarantor on the home loan and taking out a home loan with a longer term. However, you should carefully weigh up the pros and cons of these options. For example, a longer term will reduce your repayments and hence may increase your borrowing power – however, it also means you’ll pay more interest over the life of the loan. Similarly, different loan types, such as interest-only home loans, can also influence the amount of interest you pay over the life of a loan.
If you are a first-home buyer, you may be able to save towards buying a home with the First Home Loan Deposit Scheme (FHLDS), and be eligible for the First Home Owner Grant (FHOG).