Debbie Shankar - 2 Feb, 2015

Factors that Affect Your Borrowing Capacity

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Before you buy a home it is important to calculate how much you can borrow. Working out your borrowing capacity now, rather than later, will save you a lot of heartache in the future.


Well, just imagine if you stumbled upon your dream home, fell in love, and then discovered that you couldn’t afford to buy it.

How would you feel?

Heartbroken, deflated and possibly even a little angry.

So how can you avoid this?

Calculate how much you can afford to borrow using a borrowing calculator, then adjust your property search to your budget. This way you’ll never even see the homes that you cannot afford.

What Affects My Borrowing Capacity?

There are a number of factors that dictate to how much you can borrow, the most important being as follows:

•  Your income – How much you earn on a monthly basis. These are ongoing payments, such as income from employment, government payments, bonds, shares, and high investment, along with rental income and child support payments.

•  Your assets – Your property, vehicles, boats and anything of value that you own enable a lender to assess your worth financially. The more assets you have the greater your worth. However, in saying this, a lender will also want to know how much is owed on these assets, as that amount then becomes a liability and may reduce your borrowing capacity.

•  Value of the property you’re looking to buy – Ideally the property you are seeking to buy needs to be worth more than the amount you are seeking to borrow. The greater the value of the property and the less you borrow, the more equity or value you have in the home, which, in turn, means less risk for a lender.

•  The size of your deposit – The greater your deposit amount, the less you will have to borrow from a lender. This will also mean that you have greater equity in your property, which equates to less risk for a lender.

•  The amount of debt you have – The greater your existing debt, such as store and credit cards, vehicle and personal loans and other ongoing financial commitments, the less you’ll be able to borrow.

•  Your credit history – If you have a long-standing record for being able to meet your financial obligations, then you may be able to borrow more. But, if you fail to pay bills on time and have a poor credit history, then you may find that the amount you can borrow will be restricted and your interest rate may be higher due to increase risk.

•  Your lifestyle and living expenses – Typically a lender will use a formula to calculate your living expenses. This can vary greatly from lender-to-lender and is usually between $1200 to $2500 per adult per month.

•  The number of dependants or children you have – Usually a lender has a set value for the cost of a dependant. A dependant can reduce your borrowing capacity by $300 a month, which is equivalent to having a $10,000 credit card limit. Therefore, the greater the number of dependants, the less you can borrow.

•  Single or joint application – The more you earn, the more you can borrow. So a joint application with one or more people will allow you to collectively borrow more.

Are you thinking of buying a home, but want to know more about your borrowing capacity? If so, then contact eChoice, we can help you.

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