Dreaming of buying a home but unsure how much you can afford? Understanding your borrowing capacity is crucial in your homeownership journey. It determines the maximum amount a lender is willing to loan you, shaping your property search and financial planning.

What is Borrowing Capacity?

Borrowing capacity, also known as borrowing power, is the maximum loan amount a lender approves based on your financial situation and their lending criteria. It’s a personalised figure that considers your income, expenses, assets, and debts.

How is Borrowing Capacity Calculated?

Lenders use a complex formula to assess your borrowing capacity, taking into account various factors:

• Income: Your gross income, including salary, wages, bonuses, rental income, and other regular income sources.
• Expenses: Your living expenses, such as rent, utilities, groceries, transport, and entertainment.
• Debts: Existing financial commitments, including credit card debt, personal loans, car loans, and other outstanding loans.
• Assets: Savings, investments, and other assets that demonstrate your financial stability.
• Credit history: Your credit score and repayment history, reflecting your creditworthiness.
• Interest rates: Current and projected interest rates, impacting your repayment capacity.
• Loan term: The duration of the loan, influencing the size of your repayments.
• Lender’s criteria: Each lender has its own risk appetite and lending policies, which can affect your borrowing capacity.

Factors Affecting Borrowing Capacity:

Several factors can influence your borrowing capacity:

• Income level: Higher income generally leads to higher borrowing capacity.
• Debt-to-income ratio: A lower ratio of debt to income indicates greater borrowing capacity.
• Credit score: A good credit score enhances your borrowing power.
• Living expenses: Lower expenses increase your capacity to repay a loan.
• Deposit size: A larger deposit reduces the loan amount and potentially increases borrowing capacity.
• Loan type: Different loan types have varying criteria and may affect your borrowing capacity.
• Interest rates: Higher interest rates reduce borrowing capacity due to increased repayment amounts.

Why is Borrowing Capacity Important?

Knowing your borrowing capacity is crucial for:

• Setting realistic expectations: Understand your affordability range and focus your property search accordingly.
• Planning your finances: Determine how much deposit you need and how much you can comfortably repay.
• Negotiating with confidence: Approach lenders and sellers with a clear understanding of your financial position.

Maximise Your Borrowing Power:

• Reduce your debt: Pay down existing debts to improve your debt-to-income ratio.
• Increase your income: Explore opportunities to boost your earnings, such as overtime or a second job.
• Improve your credit score: Maintain a good credit history by paying bills on time and managing credit responsibly.
• Save a larger deposit: A larger deposit reduces your loan amount and increases borrowing capacity
• Compare lenders: Different lenders have varying criteria, so compare options to find the best fit.

Unlocking your borrowing potential:

Understanding your borrowing capacity is a crucial step in your homeownership journey. By carefully assessing your financial situation and exploring options with different lenders, you can maximise your borrowing power and achieve your property goals.