How do banks and lenders determine your borrowing power?
When purchasing a property, unless you have a significant amount of cash, the likelihood is you’ll be seeking a home loan and that can be a difficult area to navigate.
Banks and lenders assess you on a host of different criteria when applying for a home loan to determine how much they’re prepared to let you borrow. But which factors and information do they use in deciding the final figure?
SiteFinder is here to help with some insights on what banks and lenders consider when determining your borrowing power.
Can you handle a higher interest rate?
Most of the time when trying to gauge borrowing power, people make calculations based on current interest rates. However, when lenders are doing their own calculations they’ll usually use a significantly higher interest rate.
Many lenders will do their own calculations with a hypothetical interest rate that is as much as double the current rate so that if rates did go up, they’d be confident you could still make repayments.
The size of your deposit
The size of your deposit has a significant impact on how much you can borrow.
Even if you have a high steady income and the right credit history if your deposit isn’t much to look at it’s going to, unfortunately, limit you.
So, if you’re looking to borrow big, consider saving big and ensuring you have the funds.
Income is not all equal
A high income will weigh in your favour when it comes to determining the maximum amount you can borrow but there are still different standards applied to different types of income and the banks will prefer some over others.
For example, if you’re self-employed or if you hold a casual position, banks and lenders will take that into consideration.
Banks and lenders are looking harder than ever at borrowers own expenses.
To ensure you can make repayments, the banks will use the higher of either your estimated living expenses or their calculation of the minimum expenses for a family of your size.
Even if you are applying for a mortgage without your spouse the banks will still include their living expenses in their assessment. This is to make sure that you can still support your family and afford to pay your new mortgage.
However, regardless of the bank’s calculations, it’s important to factor in your living expenses to ensure you yourself can sustain your lifestyle and make repayments.
Before you take the plunge…
Remember, before investing any of your own or borrowed money down on a property, make sure you know the history, development potential and scopes of said property.
SiteFinder offers complete property reports with easy to understand property information so you know what you’re getting into.
Just type in an address, and instantly access a detailed Site Report complete with all the property information you need, from whether your neighbours can block your view through to whether you subdivide.