Whether you’re a first home buyer or looking for a change, you’ll need to know your borrowing power and what affects it. “How much can I borrow on a home loan?” is a common question and something you need to establish before house hunting or seeking finance.
Discover what lenders consider before approving a home loan, as well as actionable insights for making informed decisions about your home loan options.
- What Determines Your Borrowing Capacity for a Home Loan?
- Are there any other factors that will affect your home loan?
- Find out how much you can borrow
What determines your borrowing capacity for a home loan?
Known as your borrowing capacity, several factors determine how much you can borrow to purchase a home. Understanding this is important for clarity, and having an idea of how much you can spend on a house.
1. Record all your Income sources
Before you can consider applying for a home loan, you need to determine the total of your primary source of income and any additional income sources you may have like interest, dividends, rent etc. Note that it’s your net income that counts, after taxes.
You might believe that the greater your income, the more money you can borrow. That’s not necessarily the case, as the following factors are also considered when determining your borrowing capacity.
2. Calculate your living expenses
Your take home income (after tax) is not all disposable income (money that doesn’t have to cover bills and living expenses). You need to know exactly how much you spend on living expenses every month, including groceries, fuel, travel, energy, phone, school fees, insurances, memberships, clothing, toiletries, haircuts, hobbies and other regular purchases.
You must also include your existing financial commitments, such as credit card debt and personal loans. When you subtract all your monthly expenses from your monthly net income, you’ll know your current level of disposable income.
3. Find out your credit rating
There are several credit reporting agencies in Australia. Equifax is one of the most popular, and you can also use third-party platforms such as Canstar to obtain a free personal credit report.
For greater borrowing power and home loan approval, you must have a good credit score and clean credit reports. It’s not just your consistency in repaying personal loans or credit cards that affect your overall credit score. Late utility bill payments also have an impact. The length of your credit history plays a role, and so does the amount you currently owe on loans and credit cards.
It’s wise to check your credit score before applying for a home loan.
4. Review your deposit size
Your deposit size impacts your borrowing capacity and limits. Prospective homebuyers typically need a deposit of 20% of the purchase price before applying for a loan.
Loan-to-Value Ratio (LVR) also plays a role. LVR is the percentage of a property’s value that a bank or other lender is willing to finance. Lenders calculate this percentage by dividing the loan amount by the property value. Therefore, the bigger your deposit, the lower the LVR will be. This increases your chances of home loan approval.
Are there any other factors that will affect your home loan?
Yes, other factors affect the amount of your home loan and whether your application will meet with approval.
A. Employment stability
Lenders consider your employment history when assessing home loan applications. They look for job stability and a history of consistent income. These factors demonstrate whether you can make your mortgage payments every month.
A sketchy employment history and inconsistent income patterns increase the lender’s risk, leading them to believe you won’t be able to meet your financial obligations.
B. Property-specific factors
In Melbourne the type of property, its value, and its location significantly impact home loan approval. Lenders consider these three factors to assess a property’s true market value. In turn, this determines the amount they are willing to lend.
For example, a high-value property in a prime location may have a greater chance of loan approval compared to properties in lower value, less sought-after areas. Potential resale value and market trends also come under scrutiny.
Approved loans for properties considered higher risk will usually come with stricter terms.
C. Interest rates and loan terms
Higher interest rates can reduce your borrowing potential, as they increase the monthly repayments on your home loan. This means you can borrow less money overall. Longer loan terms lower your monthly repayments, but increase the amount you ultimately repay due to the total interest paid over the life of the loan.
Find out how much you can borrow
Use our handy borrowing power calculator to determine your approximate home loan borrowing capacity. It’s a good starting point. It’s also important to seek personalised advice to simplify the home loan process.
Melbourne Home Loans
At Lend&Co, we offer expert personalised home loan solutions in Melbourne to help you achieve your property goals and dreams. We can help you with the home loan pre-approval process, so book a strategy call today and also try our borrowing calculator.
