How to Increase Borrowing Capacity Before Applying for a Home Loan

Your Income and Expenses Both Affect Borrowing Power

Income is one of the key factors used to calculate borrowing power, but lenders also look at the money going out each month. Regular living expenses, bills, personal loans, car loans, credit cards, child support and other commitments may all affect how much you may be able to borrow.

Some forms of income may also be assessed differently depending on the lender and your financial circumstances. For example, rental income from an investment property may be considered, but a lender may not necessarily use the full amount when calculating borrowing capacity.

Reducing Existing Debts May Increase Your Borrowing Power

Existing debts may have a direct impact on your borrowing capacity because lenders need to consider the repayments you already make. Paying down outstanding debts or reducing unnecessary credit may leave more income available to meet potential home loan repayments.

Credit card limits are one factor that may affect borrowing capacity. Even if you do not owe much money on a card, the available credit limit may still affect a lender’s assessment because it represents debt you might potentially use. Reducing a credit limit or closing an unused account may affect some borrowing calculations, depending on the lender and your overall financial circumstances.

Having less debt does not automatically mean a larger loan offer. The lender will still assess your income, expenses, credit history and the proposed loan as a whole.

Reviewing Living Expenses May Strengthen Your Preparation

Reducing expenses may help improve your financial position before applying, particularly where you are paying for products or subscription services you no longer use. Reviewing spending may help provide a more accurate view of actual living costs and identify unnecessary expenses that may be reduced where appropriate.

Reviewing recent bank statements may help show regular income, expenses and living costs each month. It may also make it easier to prepare realistic figures for a lender and work out what repayment amounts may fit within your budget alongside other property costs.

Your Credit History May Affect a Home Loan Application

Your credit history gives lenders information about how you have managed credit and repayments. Before a home loan application, some borrowers may check their credit score and review their credit history for information that may need attention. A higher credit score does not guarantee home loan approval, greater borrowing power or a lower interest rate. However, missed repayments, defaults or multiple recent credit applications may affect how a lender views the application. If information on a credit report appears incorrect, a borrower may contact the relevant credit provider or credit reporting body to request a review.

A credit score may change over time based on information recorded in a borrower’s credit history and how credit commitments are managed. Paying bills and loan repayments on time, managing existing credit and limiting unnecessary credit applications may affect credit history over time.

A Larger Deposit May Reduce How Much You Need to Borrow

A larger deposit may reduce the loan amount needed to purchase a property. While this does not necessarily increase borrowing capacity itself, borrowing less may make the required repayments more manageable and might affect the range of home loan options available. The size of the deposit may also affect whether lenders mortgage insurance may apply. Lenders mortgage insurance generally protects the lender rather than the borrower and may be required in some situations where the deposit is smaller.

When considering a new property, borrowers may also account for upfront costs rather than treating all available savings as the deposit. The amount required will depend on the property, loan type and individual circumstances.

Interest Rates and Loan Structure Affect Repayment Amounts

The interest rate used in a lender’s assessment may affect borrowing power because a higher assumed repayment means less income is available for additional borrowing. Lenders also assess whether borrowers might continue to meet repayments if interest rates were higher than the rate offered on the loan.

Loan structure may also influence repayment amounts. A longer mortgage term may reduce scheduled repayments compared with a shorter term, but it may also mean paying interest for longer. Fixed rate period options, variable rates, fees and other product features may also affect the overall cost and flexibility of a home loan.

Different Lenders May Assess Borrowing Capacity Differently

There is no single borrowing capacity figure that applies across every lender. Each lender may have different policies for assessing income, living expenses, existing debts, rental income, credit limits and other parts of your finances.

Different lender policies are one reason some borrowers compare home loan options before submitting a formal loan application. A finance broker may discuss your financial circumstances; explain how different lenders may assess them and help compare available loan options without suggesting that any particular outcome is certain.

Preparing for the Next Step in Your Home Loan Journey

Borrowing capacity may be affected by several parts of a borrower’s financial situation rather than one single factor. Reviewing existing debts, credit card limits, living expenses, savings, credit history and how much you need to borrow may help explain the factors a lender considers in a home loan application.

Eurobodalla Finance may help explain borrowing capacity, compare available home loan options and discuss how different lenders may assess your financial circumstances, subject to their lending criteria. Any loan or increase in borrowing remains subject to lender assessment, eligibility requirements and applicable credit criteria. This article is general information only and does not take into account your objectives, financial situation or needs. It is not personal advice.