If you’re in the market for a home loan, it’s important you have a solid understanding of how your borrowing power is determined. Your borrowing capacity is the maximum amount you can borrow from a lender, and a range of factors, including your debt, income, spending habits, credit score, and more influences it. Let’s take a closer look at each of these factors and how they impact what you can borrow and, therefore, what you can spend.
Your Debt
One of the biggest factors lenders consider when calculating your borrowing capacity is your current level of debt. This includes any outstanding loans or credit card balances you may have and what’s owing with any “buy now, pay later” providers. Lenders need to be confident that you’re consistently making your current loan repayments on time and in full each month and that, with added debt burden, you’ll be able to manage your repayments. If you have significant consumer debt, consider paying off what you can, as it can negatively impact your borrowing power.
Your Income
Your income is another key metric lenders consider when assessing your borrowing capacity. You’ll need to provide recent pay slips to show your income and demonstrate to the lender that you’re in a stable financial position and have the capacity to make regular loan repayments over an extended period of time. For those with low, sporadic or self-employed income, securing a loan is not impossible but can require a different and personalised approach. It’s recommended you set up a time to chat with me about your situation before becoming either overly optimistic or decidedly despondent.
Spending Habits
Your spending habits will also be taken into consideration by lenders when they’re assessing your situation, and yes, you’ll need to provide bank statements to show your current financial habits. Lenders want to see that you have enough money left each month after bills and other expenses, to make regular loan repayments. It’s important you present your finances in the best light possible – so if you’ve accumulated high levels of non-essential spending, cut back on those types of purchases to demonstrate your ability to manage debt.
The Home Loan’s Interest Rate
The current interest rate creep also plays a role in determining your borrowing capacity. A higher interest rate will mean higher loan repayments, which can reduce your borrowing power. On the other hand, a lower interest rate will mean lower loan repayments and could potentially increase the amount you can borrow. One of the advantages of securing the services of a broker comes from the negotiations we’re able to have with lenders to secure the best possible interest rate for you.
Deposit Size
Your deposit size also impacts how much you may be able to borrow from a lender. The larger the deposit, the less money you’ll need to borrow and the more likely you will be approved for a loan. A small deposit can still get you approved for a loan, especially if there are government schemes and incentives available to you.
Credit Score
A good credit score indicates to lenders that you’re a responsible borrower who will likely repay their loan on time each month. A bad credit score, on the other hand, could indicate to lenders that you’re a high-risk borrower and may not be able to service a loan. The consequences of a poor credit reputation might mean they either reject your loan application or offer a smaller loan amount than you were hoping for.
Navigating the maze of home loan applications can be a complex and challenging task which is why it pays to have Grow Financial Solutions in your corner. We do what it takes to present your application in the best possible light to maximise your borrowing capacity and secure the loan you need to purchase the house of your dreams. With our experience, knowledge and contacts within the finance sector, we have the potential to turn an otherwise time-consuming and tedious process into a seamless one. Contact us today on 0468 455 685 for more information on how we can help you navigate the home loan application process.