If you’re planning to buy a home, one of the first questions you might ask yourself is, how much can I borrow? Understanding your borrowing power is crucial in setting realistic expectations and ensuring you’re financially prepared for homeownership.
This article explores the key factors affecting your borrowing capacity, common challenges home buyers face and helpful tips to improve your chances of securing a home loan.
Factors Influencing Borrowing Capacity
Lenders assess various factors to determine how much you can borrow and knowing these in advance can help you navigate the home loan process with confidence. These factors include:
- Income – Your income level and stability directly impact your borrowing power. Lenders consider salary, rental income, bonuses and other revenue streams to assess your ability to repay a loan.
- Credit History – Your credit score is a critical factor in the home loan approval process. A strong credit score can improve your borrowing capacity, while a poor credit history may result in higher interest rates or loan rejection.
- Existing Debts and Liabilities – Lenders assess your current financial commitments, including car loans, credit card balances and personal loans. A high debt-to-income ratio can reduce your borrowing power.
- Savings and Deposit Amount – The size of your deposit influences your borrowing capacity. A higher deposit reduces the loan-to-value ratio (LVR) and can eliminate the need for Lenders Mortgage Insurance (LMI).
- Employment Status – A stable, full-time job is favourable for loan approval, whereas self-employed individuals may need to provide additional documentation to prove financial stability.
- Age and Financial Commitments – Your age and long-term financial responsibilities, such as dependents, can impact your borrowing power. Lenders may adjust loan terms based on your expected retirement age.
- Property Details – The type and location of the property you’re purchasing can also influence how much you can borrow. Lenders may have specific criteria for high-risk or rural properties.
Common Challenges (Pain Points) in Securing a Home Loan
Securing a home loan can be a complex process, with several challenges that may impact your ability to borrow the amount you need. Here are some of them:
- High Property Prices – Rising housing prices across Australia mean buyers need larger deposits and higher loan amounts, making affordability a challenge.
- Stringent Lending Criteria – In recent years, lenders have tightened loan requirements, increasing scrutiny on income, expenses and financial behaviour.
- Impact of Existing Debts – Student loans, credit card debt and car loans can reduce borrowing capacity, affecting how much you can borrow for a home loan.
- Employment Instability – Casual, contract and self-employed workers often face additional hurdles in proving income stability to lenders.
- Age-Related Constraints – Older applicants may struggle with shorter loan terms, reducing their borrowing power.
How to Improve Your Borrowing Power
Improving your borrowing power is key to securing a better home loan deal. By making strategic financial adjustments, you can increase your chances of loan approval and access more favourable terms.
Use a Borrowing Power Calculator
Before applying for a home loan, use a borrowing power calculator to estimate how much you might be eligible to borrow based on your income, expenses and debts.
Improve Your Credit Score
Paying bills on time, reducing outstanding debts and avoiding late payments can boost your credit score and enhance your borrowing capacity.
Reduce Existing Debts
Lowering your credit card balances and paying off personal loans can improve your debt-to-income ratio, increasing your chances of loan approval.
Save for a Larger Deposit
A deposit of 20% or more can help you avoid LMI and improve your loan terms.
Maintain Stable Employment
Avoid changing jobs before applying for a home loan. If you’re self-employed, ensure your financial records are up to date and demonstrate consistent income.
Use a Home Loan Calculator
A home loan calculator can help you estimate monthly repayments, allowing you to budget effectively before committing to a loan. Use our free online calculator now.
Seek Professional Advice
Consulting with a mortgage broker can provide insights into lender requirements and help you find the right loan options for your financial situation.
Utilise Government Schemes
First-time buyers may be eligible for grants, stamp duty concessions and first home buyer schemes like the First Home Guarantee, reducing upfront costs.
ZEP Finance Helps You Answer the “How Much Can I Borrow” Question
Asking “How much can I borrow?” for a home loan isn’t an easy question to answer all by yourself. It requires careful consideration of your financial position, creditworthiness and lender requirements.
Improving your credit score, reducing debts and maintaining stable employment can help enhance your borrowing power. Taking care of these can increase your chances of securing a home loan that aligns with your financial goals.
If you need help assessing your borrowing power and assistance with your home loan, ZEP Finance is here for you. To find out how we can support your homeownership dreams, contact us and we will gladly show you the way.
After studying business and finance at university, Zain initially expected to pursue a career in finance. However, his passion for property and the experience of buying his own home led him to mortgage broking. He began his mortgage brokering career in 2009 and founded ZEP Finance in 2010.
