05 Nov 2022

How Do Banks Calculate Borrowing Capacity?

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.

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