If you’re looking to purchase a home or investment property, you might come across the term ‘borrowing power’. Knowing your borrowing power is crucial because it can help you understand how much you can afford to borrow, what properties are within your budget and what steps you might need to take to improve your borrowing capacity. This concept might seem complex, but breaking it down into key components can make it easier to understand:
What is borrowing power?
Borrowing power, also known as ‘borrowing capacity’, refers to the maximum amount of money a lender is willing to loan you to buy a property. Essentially, it’s a measure of how much debt you can comfortably take on and repay based on your financial situation.
How is borrowing power determined?
How much you can borrow can vary between lenders, however most will generally need the same information to accurately assess your borrowing power, including:
- Income: Lenders will want to ensure you have a steady and sufficient income to cover loan repayments. This includes salaries, rental income, or any other regular source of income.
- Expenses: Lenders will assess your regular expenses, including rent or mortgage payments, utilities, groceries, and other living costs. They want to understand how much of your income is already committed to existing expenses.
- Existing debts: If you have other loans or credit card debts, these will reduce your borrowing power. Lenders consider your debt-to-income ratio, which is the percentage of your income that goes towards paying off existing debts.
- Credit score: Your credit score is a representation of your ‘creditworthiness’ and is based on your loans and debts i.e., how much you borrow and your history with repayments. Essentially, your credit score tells lenders how much of a risk you are when you're looking to borrow money with a higher credit score usually translating to a higher borrowing power.
- Employment stability: Lenders often prefer borrowers with stable employment. A long-term job with a reliable income stream boosts your borrowing power, while frequent job changes or unstable income can lower it.
- Savings and assets: Having savings or assets (such as investments) can improve your borrowing power and demonstrates you have a financial ‘cushion’ to fall back on if you need.
- Loan type and term: The type of loan you want and its term (the length of the loan) can also affect your borrowing power. For example, a longer mortgage term might increase your borrowing power because the repayments are spread over a more extended period, making them smaller and more manageable each month.
Use our Borrowing Power Calculator to estimate how much you could potentially borrow for a home loan.
How to improve your borrowing power:
- Pay down debts
Pay down your high interest debts such as credit cards and personal loans. The less debt you have, the more you will have to put towards your home loan repayments. - Improve your credit score
You can improve your credit score by paying bills on time, paying down your debt and avoiding multiple applications for loans and credit cards which is all recorded against your credit score.
Read our article 'What is a credit score and does everyone have one' to learn more. - Reduce living expenses
Review and reduce your living expenses in the lead up to your loan application. Lenders will generally want to look at your bank statements for the six months prior, assessing your spending habits and whether you can comfortably and realistically afford your home loan repayments. Cutting down on unnecessary expenses increases the amount of your income available for loan repayments and will help bolster your savings.
Read our article ‘8 tips for saving more money’ to find out how you can reduce your expenses. - Reduce your credit card limit
If you’re not reaching your credit card limit each month, consider lowering it. While you may not be spending the limit on your card, it could still be seen as a potential debt and impact your borrowing power. - Save more for your deposit
The more you have saved for a deposit, the less you will need to borrow. Building a robust savings account also shows lenders that you have the discipline to manage your finances effectively.
Speak to an Auswide Bank lending consultant
If you’re in the market for a home loan, chat with one of our lending consultants face-to-face, over the phone or via a video call. They can provide you with expert advice to help you along in your home loan journey.
Find out more about our range of Home Loans.
Auswide Bank Ltd ABN 40 087 652 060, Australian Credit Licence 239686 is the credit issuer. This is not an offer to lend - approval is subject to credit assessment criteria. Terms, conditions, fees & charges apply - full details on application. Prior to entering into a credit contract with us you should read our Credit Guide. This information provides general advice only. We do not provide advice about this product based on any consideration of your personal objectives, needs or circumstances.
