How Do Banks Calculate Borrowing Capacity?
Potential borrowers researching the various aspects of loans may want to know more about how banks calculate borrowing capacity. There are a wide variety of lending establishments, including banks, that have their own way of calculating borrowing capacity. However, there is a standard way of calculating borrowing capacity that is commonly used: finding the difference between an individual’s net income and total monthly expenses.
Borrowing capacity allows a lender to determine an applicant’s overall risk factor, ability to make loan repayments, and the amount they are approved to borrow. An applicant with a low credit score and poor financial history will generally be determined as a high-risk borrower. An applicant with a high credit score and good financial history will generally be determined as a low-risk borrower.
There are a wide variety of elements that can affect applicants borrowing capacity, including the following examples:
- All income types an individual receives
- Any assets or debts currently owned
- Financial status and credit score
- Involuntary monthly expenses
- The loan deposit amount
- The number of dependents an applicant has
If an applicant determines their borrowing capacity is too low, they can improve their capacity through several methods, including the following examples:
- Improving their credit score and financial history
- Closing any unnecessary credit cards
- Making consistent debt repayments
- Saving for a larger deposit
- Decreasing high credit card limits
- Adding a guarantor to the loan in question
If you have additional questions regarding borrowing capacity or are ready to apply for a loan, reach out to the professional Mortgage House lending specialists for more information and specialised loan application assistance.