Your borrowing capacity is something you need to know before you commence your property search as it tells you how much you can spend on your new home and where you can afford to live.
Your borrowing power will vary between banks and lenders because they use different methods to assess your capacity and have different lending criteria. Many borrowers go a step further and give pre-approvals on their loans.
Knowing your borrowing power or borrowing capacity is a good place to start when purchasing a property as it will give you an idea of how much you can afford to borrow. Knowing how much you can afford to borrow will help you stick to your budget when searching for a property. Use this borrowing capacity calculator to get an estimate of your borrowing capacity.
As a guideline, when determining how much you can borrow banks and lenders will look at:
- Credit card limits
- Income and types of income e.g. casual, contract, full-time
- The size of the loan compared to the property value
- Number of dependents and their situation
- Type of loan
- General living expenses, and
- Existing asset position (including the size of your deposit)
All the variables above can affect your borrowing capacity. However, there are simple steps you can take to give a little boost to your borrowing power. This could let you open up more options to choose from and turn the key to your dream home.
Tips for increasing your borrowing power:
- Pay off and close any credit card or overdraft facilities
If you have a savings account lying around, you might want to clear your overdraft and pay off any credit card bills. Being off interest rates from credit cards actually saves you money, more than what you receive from savings rates. Next time, you can even stick to a lower credit limit or switch to a cheaper overdraft provider.
- Do the sums and stick to a budget to improve your deposit and savings history
Sticking to a budget isn’t easy but can be fulfilling once achieved. Keep in mind that you should never spend more than what you have. And if you’re thinking of a big purchase, delay gratification, especially if it’s something you don’t really need. Think about the benefits of every purchase and make sure it’s not putting on a strain on your budget. When getting your pay, setting money aside first is the best way to create some buffer for future necessities.
- Pay off outstanding term debts (e.g. personal loans)
Get a head start on your goals when you pay off any personal loans through extra monthly payments or by paying more than the minimum. Start with paying off the most expensive loan first as it has the highest interest rate that’s taking chunks off your finances. Or try the snowball method, which requires you to pay with your smallest balance first. After paying that off, you roll the same payment and work your way up to the largest balance.
Talk to a Loan Market adviser today and get the expert financial advice you need for your borrowing capacity.