Without a doubt the most common question mortgage brokers get asked is; ‘How much can I borrow?’ But there is no one-size-fits-all answer.
To put it simply, how much you can borrow from a lender is known as ‘borrowing power’. This magic number can depend on multiple factors unique to the borrower and goes beyond income alone. Having a solid understanding of what can increase or decrease your borrowing power is extremely helpful when it comes to applying for a home loan.
Brokers look at the bigger picture
Because our mortgage brokers are remunerated the same way, regardless of which lender you choose, they have no banking bias approach. This means they keep their client’s best interests in mind while they identify the most suitable lender based on a customer’s financial needs and objectives.
Mortgage brokers are there not just to support you throughout the lending process but can also conduct regular home loan health checks (generally every 12 to 18 months) to ensure your needs and objectives haven’t changed and your loan is still the best option for you.
How lenders calculate borrowing power
There are many lenders in the mortgage market and each has their own way of crunching the numbers. Thankfully, there are also many useful online calculators, such as Landen’s savvy tool https://landen.com.au/borrowing-power-calculator/ which can help potential purchasers get an idea of what they might be able to borrow.
Some of the factors impacting your borrowing power include but not limited to:
Income – Some people make a healthy chunk of their annual earnings through bonuses, commissions, freelance or seasonal work. However, not all lenders include these income streams when calculating borrowing power and prefer to concentrate on PAYG pay with regular payslips. So, if you’re self-employed, seasonally employed or on a contract role, it’s important to find a lender who offers flexible assessments and will take the time to verify your income.
Lifestyle, living expenses and assets – Your personal cost of living will come into play when seeking a mortgage. How much you can borrow will be determined on how expensive your life is on a daily basis which includes personal loans, school fees, HECS debt, and other regular payments. By maintaining a genuine savings habit, you can prove to potential lenders that you’re able to comfortably service a home loan, which is especially important for first-home buyers. How your transactions reflect in your bank account can have an impact. Lenders will also take into account any assets you might already have, whether that be property, shares, or other investments.
Credit history – Lenders want to know how you’ve handled money in the past. If you have a history of outstanding debts, multiple pay later accounts, or repeated loan applications then it will affect your financial future.
General market conditions – Factors outside your control can also influence borrowing power. The most common external impact is from interest rate movements. While rates fell prior to, and during, the pandemic potential buyers had more borrowing power. Today, in an environment where rates are rising the borrowing power is decreasing.
Equity in property – Equity is the figure between the current market value of your property, and what you still owe on your mortgage. If you have equity in your home or other investments, then it may be possible to leverage that without actually selling the property.
Why borrowing power is unique
Two typical borrower scenarios our brokers at Landen come across are; couples with kids looking to upsize, and individual first-home buyers. Here are two case studies demonstrating how the Landen team helped them take the next step in their property journey:
We recently assisted a married couple with two kids find their next family home. The parents were employed full time and together their household income was just over $200,000.
They bought their first home for $700,000 back in 2017 and at the time they borrowed $630,000.
By 2022 that same family home was valued at $1.2 million and their loan balance had gotten down to $520,000.
After refinancing their existing loan, they were able to access $440,000 in equity.
They decided to rent out their existing property for $600 per week and then upgraded to a bigger family home valued at $1.4 million which was closer to their children’s school.
The first-home buyer
We worked with a single mother of one child in NSW who wanted to get onto the property ladder.
Her annual income was $110,000 and she had 5% genuine savings to go towards the deposit of her first home. The property she was looking to buy was a brand-new home valued at $550,000.
Given her personal circumstances, this client qualified for the Federal Government’s Family Home Guarantee Scheme, therefore she avoided having to pay lenders mortgage insurance, and as the residence was newly built and under the stamp duty threshold of $650,000, she was also eligible to receive a First Homeowner’s Grant of $10,000 and pay no stamp duty.
We not only helped the customer with lending, but also secured the loan with her preferred lender and negotiated the most competitive interest rate within the current market.
If you’d like to know your borrowing power, or establish strategies to help maximise your borrowing power, the team at Landen have the answers. Call 1300 526 336 or click here to book a home loan health check today.