How Much Can You Borrow? Key Factors Lenders Consider To Assess Your Borrowing Capacity

When planning to buy a home, one of the most important questions is, "How much can you borrow?" Understanding your borrowing capacity helps set realistic expectations and ensures a smoother mortgage application process. Lenders assess multiple factors to determine your borrowing power, and knowing these can help you prepare and optimize your financial position.

Understanding borrowing power: Key factors lenders consider when approving your home loan.

1. Your Income

Why It Matters: Your income is the foundation of your borrowing capacity. Lenders want to ensure you can comfortably meet your repayment obligations.

What They Look For:

• Employment Type: Full-time, part-time, casual, or self-employed.

• Income Stability: Consistent income over time is preferred.

• Additional Sources: Bonuses, commissions, rental income, or government benefits may also be considered.

Tip: If you are self-employed, provide up-to-date tax returns and financial statements to demonstrate income consistency.

2. Your Expenses

Why It Matters: Lenders need to evaluate your living expenses to understand how much of your income is already committed.

What They Look For:

• Day-to-day expenses like groceries, utilities, and transportation.

• Fixed commitments such as school fees or child support payments.

Tip: Review your spending habits before applying for a loan. Reducing discretionary expenses can improve your borrowing power.

3. Your Debts

Why It Matters: Outstanding debts reduce the amount of income available for new loan repayments.

What They Look For:

• Credit card balances and limits (even unused credit limits).

• Personal loans, car loans, and other financial obligations.

• Buy-now-pay-later services (e.g., Afterpay or Zip Pay).

Tip: Close unused credit accounts and reduce existing debts to improve your financial standing.

4. Your Credit Score

Why It Matters: A good credit score indicates that you are a responsible borrower. Lenders use this to assess the risk of lending to you.

What They Look For:

• Timely repayment history on previous loans or credit.

• Defaults or missed payments that could raise red flags.

Tip: Check your credit score before applying for a loan and resolve any issues that might affect your application.

5. Deposit Size

Why It Matters: The amount of deposit you can contribute directly impacts the loan amount and your eligibility.

What They Look For:

• Larger deposits lower the Loan-to-Value Ratio (LVR), reducing lender risk.

• A deposit of 20% or more can help you avoid Lenders Mortgage Insurance (LMI).

Tip: Save as much as possible before applying, and consider government schemes like the First Home Guarantee if you have a smaller deposit.

6. Loan Term and Interest Rate

Why It Matters: The length of your loan and the interest rate affect the monthly repayment amount, which in turn influences how much you can borrow.

What They Look For:

• Shorter loan terms result in higher monthly repayments, potentially lowering borrowing capacity.

• Lower interest rates make loans more affordable, increasing borrowing capacity.

Tip: Compare lenders to find competitive interest rates and flexible loan terms that suit your needs.

7. The Property Itself

Why It Matters: Lenders assess the property you’re buying to ensure it serves as adequate security for the loan.

What They Look For:

• Location, type, and condition of the property.

• Properties in high-risk areas (e.g., flood zones) or unique properties (e.g., small apartments) may affect borrowing limits.

Tip: Consult your mortgage broker to confirm that your desired property aligns with lender criteria.

8. Lending Policies

Why It Matters: Each lender has unique policies and risk appetite, which can affect how much they’re willing to lend.

What They Look For:

• Maximum Loan-to-Value Ratios (LVR).

• Borrowing restrictions for certain occupations or loan types.

Tip: Work with a mortgage broker who can guide you to lenders whose policies match your financial profile.

How to Improve Your Borrowing Power

If you're aiming to increase how much you can borrow, here are some actionable steps:

1. Increase Your Savings: A larger deposit can help boost your borrowing capacity.

2. Pay Down Debt: Reducing or eliminating debts improves your financial standing.

3. Budget Wisely: Minimize unnecessary expenses to showcase better financial management.

4. Improve Your Credit Score: Address any issues on your credit report and maintain a positive payment history.

5. Seek Professional Advice: A mortgage broker can help you identify opportunities to enhance your borrowing power and match you with the right lender.

Your borrowing capacity is influenced by a combination of financial, personal, and property-related factors. Preparing in advance and understanding what lenders are looking for can help you secure a loan that fits your needs.

Need Help? At LNG Mortgage Solutions, we specialize in helping clients navigate the complexities of borrowing. Contact us today to discuss your financial situation, and let us guide you toward achieving your homeownership goals.