29 Dec 2021

How Does a Lender Assess My Borrowing Capacity?

Several factors go into calculating a mortgage applicant’s borrowing capacity such as income, expenses, and current debt. To keep it simple, lenders ensure that an applicant has income left over every month after paying their expenses and financial obligations. 

Next, the lender looks at the applicant’s repayment history. They want to ensure that the applicant can handle debt, especially since a mortgage is a significant investment. 

Borrowing capacity is the amount the lender deems the applicant can borrow and afford to repay. One way to determine the capacity is to put the applicant’s finances through a stress test. 

For example, if the applicant aims to purchase a $500,000 home, they can borrow between 60% to 110% of the property’s value. With a guarantor, the homebuyer can borrow up to 110% LVR. Without it and low documentation, they may receive approval for 60%. 

Our proprietary tools at Mortgage House help our loan specialists narrow down loan term options. To ensure they reached a good decision, they apply buffering. The stress tests take a look at the applicant’s finances if interest rates increase 3%. 

To start gauging your borrowing capacity, we encourage you to try our online home loan calculators. Mortgage House also helps homeowners refinance home loan.  

Understand Borrowing Capacity Conclusion

Lenders calculate an applicant’s borrowing capacity using several ratios and tools. It’s an important figure that helps the lender confidently issue a loan. Mortgage House uses several proprietary tools to reach the capacity and appropriate loan terms. Contact our loan specialists for more information.

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