Most borrowers often ask, how much can I borrow? This question can be answered by looking at how the Bank calculates your borrowing capacity.
Every bank has their own calculator to work out your borrowing capacity. Having said that, the information that gets entered into the different calculators is largely the same.
In the video below, Liz will go through the criteria that the banks use to calculate your borrowing capacity. She will walk you through the documentation you will need to prepare before you lodge your home loan application. As well as how you can prepare your finances to ensure your loan application is successful.
Number of Adults & Children
One of the very first questions you need to answer is; how many adults are living in your home?
This includes you and your spouse obviously, as well as other adults that live in the same house and are financially dependant on you. This may include your parents and any children over 18 years of age. Full time University students and children who have not yet left the nest count towards this total.
The next question is; how many dependent children do you have?
This includes all the children under 18 years of age that depend on you financially. Even if they do not live with you.
OneSite Finance has a comprehensive Living Expenses Calculator you can use to track your current and future living expense. Some of the living expenses include costs such as:
- Food – We all have to eat
- Transport – Start looking at more public transport and less Taxis or Uber
- Holidays – The more often and the extravagant your holidays, the less you can borrow
- Children – We all know how expensive they can be. The less said here the better
- Pets – Furry family members can take up large parts of your discretionary budget especially as they get old and need veterinary care
- Education – School fees, especially the private variety can be a big drag on your borrowing capacity
- Utilities – The utilities here need to include the utility bills you pay for your home, existing investment properties as well as the utilities for the new property you are looking to purchase
- Entertainment – Uber Eats, restaurants and eating out is going to be penalised
This is the biggest determining factor when it comes to how much you can borrow. You can have massive savings, but ultimately borrowing is all about how much you can repay. This to a big extent is determined by your income. Whether that be wages, salaries or investment income.
Self-employed borrowers will be required to show 2 years’ worth of individual and business tax returns and financials. This will help to determine what income can be used in the servicing of the loan. Consistent income is key here. The Banks don’t want to see wild fluctuations.
If you are not self-employed, then the last 2 or 3 payslip from your employer, and sometimes your group certificate will be required. This will determine how much income can be used in the borrowing calculations.
If you are currently renting, you will need to include the rent you will continue to pay in this category. If you are intending to purchase an investment property, you will also need to include the investment property expenses you estimate you’ll be paying monthly.
The banks also require you to include ‘nominal rent’ if you are still living at home with your parents. Nominal rent is an agreed amount of payment made to your parents for living in their home. This is approximately $150 per week.
Credit card expenses fall into this category. Your credit card limit is important as the banks will only check your limit when assessing your borrowing capacity. It does not matter if you don’t use all your limit. It’s the fact you can that counts.
Any home/investment loans will be added in this category. The current loan balance, your interest rate, the type of repayment (principal and interest or interest only/variable or fixed rate) and the remaining loan term are the critical information points here.
These will affect how much you can borrow.
The OneSite Finance team can help you work out what is best for you in terms of your new loan. Once you decide on your new loan, the loan term will need to be entered into the calculation. Loan terms are generally 25 to 30 year terms. Having said this, not everyone can qualify or requires a 30 year term.
Repayment types are important. You will need to confirm if you want to pay principal and interest or interest only, and what product features are important to you.
Working out your borrowing capacity can be a simple process which can take 5 to 10 minutes, depending on your current situation.
If you are thinking about applying for a new loan to purchase a new property, or if you are looking to refinance an existing loan, we can help you work out how much you are able to borrow.
The OneSite Finance team can also provide you with our living expenses calculator to help you work out your current expenses. You can also check out our Home Loan Guide to help you decide on what you need to do before applying for a loan.