Your borrowing capacity is something you need to know before you commence your property search as it tells you how much you can spend on your new home and where you can afford to live.
Your borrowing power will vary between banks and lenders because they use different methods to assess your capacity and have different lending criteria. Many borrowers go a step further and give pre-approvals on their loans.
Knowing your borrowing power or borrowing capacity is a good place to start when purchasing a property as it will give you an idea of how much you can afford to borrow. Knowing how much you can afford to borrow will help you stick to your budget when searching for a property.
As a guideline, when determining how much you can borrow banks and lenders will look at:
- Credit card limits
- Income and types of income e.g. casual, contract, full-time
- The size of the loan compared to the property value
- Number of dependents and their situation
- Type of loan
- General living expenses, and
- Existing asset position (including the size of your deposit)
Tips for increasing your borrowing power:
- Pay off and close any credit card or overdraft facilities
- Do the sums and stick to a budget to improve your deposit and savings history
- Pay off outstanding term debts (e.g. personal loans)