21 Oct 2021

How Do Banks Calculate Borrowing Capacity?

Borrowing Capacity

Your borrowing capacity is the maximum amount lenders will loan to you. While there is a standard formula lenders follow, lenders may assess your income or expenses differently. Essentially, your borrowing capacity is determined by figuring out the difference between your net income (what you get paid after taxes) minus your total monthly expenses. There are a number of factors that can affect your borrowing capacity.

Factors that Affect Your Borrowing Capacity

When calculating your borrowing capacity, lenders look at a number of factors. These factors include the following:

  • Your income: this includes any overtime, bonuses, or commissions (depending on the lender), rental income, any government benefits, investment dividends, or child support payments
  • Your existing liabilities: these include any existing loans you may have or any existing debts from credit cards, car loans, HELP, or Buy Now and Pay later agreements
  • Any relevant personal information that affects your disposable income: these factors include the number of applicants applying, the number of dependents you have, rental expenses you may incur if you’re buying an investment property, your living expenses, child support payments, and the current retirement age. 

How Lenders Assess Your Borrowing Capacity Differently

Most lenders will add an interest rate buffer to your estimated interest rate when calculating your borrowing power. This is to ensure you can still afford your repayments in times of financial hardship. Some lenders may calculate your borrowing power based on your credit limit instead of using the amount you owe. In addition, lenders may decrease your borrowing capacity depending on the location of your property and how risky they consider it to be. 

At Mortgage House, we understand how complicated the home loan application process can be, which is why we work with you every step of the way. We can also help you improve your borrowing power, helping you get the most out of your income so you can purchase the home of your dreams. 

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