While every lender is slightly different, there are generally six key factors that influence the amount of money you can borrow. This is referred to as your borrowing capacity, and every lender will make an assessment of this before approving a home loan. The main factors are:
- Income
- Expenses/Lifestyle
- Credit History
- Type of home loan
- Your deposit amount
- Assets
Let’s take a look at these factors in more detail and find out how each one affects your borrowing capacity.
How your income affects borrowing capacity
Your income is one of the major factors that will be considered for a home loan. Generally, banks will want to see your recent income history in the form of tax assessments. They will likely also want recent payslips in case your income has changed in the last 12 months.
This is important to lenders because it gives them an indication of how much you can afford to pay back each month. If co-purchasing a property with your partner or someone else, both parties’ income will be taken into consideration.
In addition, some lenders will want to know about your employment status. For example, have you been in a full-time position for more than 6 months or a part-time position for more than 12 months?
How your expenses and lifestyle affect borrowing capacity
Next up are your expenses, and to an extent, your lifestyle, although the latter is difficult for lenders to accurately assess. Most importantly, lenders look at your existing expenses, such as other debts, school fees, childcare, health insurance and more. Combined with your income information, lenders can use your expenses to determine how much money you effectively have leftover for mortgage repayments.
How your credit history affects borrowing capacity
Your credit history is another big factor and may preclude you from getting a loan if you’ve got a list of previous defaults (missed bill payments, credit card repayments, bankruptcy etc). It’s always worth getting a copy of your credit report before applying for loans so that you know where you stand
We should note that some lenders are more lenient towards those with a bad credit history, however, the loans they offer may include different terms and possibly higher interest rates because they see you as more of a risk.
The type of home loan and borrowing capacity
Banks will determine your suitability against different types of home loans. For example, if you want a home loan with a low interest rate, low fees and a longer loan term, your monthly repayments will be lower so you can potentially borrow more. However, if you want a shorter loan term that saves you thousands in interest over the loan term, your repayments will be higher and therefore you might not be able to borrow as much.
How much deposit you have
Most lenders require a significant deposit towards your home loan, with the generally accepted figure being around 20% of the total loan. This not only decreases the amount you need to borrow but also shows the lender that you have the ability to save, therefore an ability to make mortgage repayments.
If you don’t have a 20% deposit, you may still be able to obtain a home loan but you’ll have to pay the mortgage or lender’s insurance. Alternatively, there are government schemes depending on your location and financial circumstances that may allow you to purchase a home with a smaller deposit.
How assets affect borrowing capacity
Assets in and of themselves don’t make much of a difference to your borrowing capacity, however, they can give your lender more information about your ability to make repayments. For example, if you have investments, shares, or even cars and boats, this demonstrates your capacity to make repayments or save money for certain things. As such, your lender may deem you to have a higher borrowing capacity.
How a mortgage broker can help
The difficulty of finding the perfect home loan, or ins some instances even qualifying for a home loan, is that there are so many lenders out there offering different products. This is why it makes sense to speak to a professional team like BrokerCo. We draw on our industry knowledge to find the perfect loan for your circumstances and financial goals. Offering an easy online service, but with real people to help you through the home purchase journey, BrokerCo is your leading, trusted and convenient mortgage broker. Contact us today to find out how we can help!
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