Why Your Borrowing Capacity May Be Lower Than Expected
Many buyers are surprised when they discover their borrowing capacity is lower than they expected.
Even with a strong income, lenders assess several factors when determining how much they are willing to lend.
Understanding these factors can help buyers position themselves better before applying for a home loan.
Living Expenses Matter
Lenders assess your monthly spending when calculating borrowing capacity.
This includes everyday expenses such as:
• Food and groceries
• Transport
• Utilities
• Entertainment
• Subscriptions
Higher declared expenses can reduce how much you can borrow.
Existing Debts Reduce Borrowing Power
Lenders include existing debts when calculating serviceability.
These may include:
• Car loans
• Personal loans
• Credit cards
• HECS / HELP debts
Even unused credit cards can affect borrowing capacity because lenders assess the credit limit, not just the balance.
Interest Rate Buffers
Banks assess your ability to repay a loan at a higher interest rate than the current rate.
This buffer is designed to ensure borrowers can manage repayments if interest rates increase in the future.
Because of this, borrowing capacity may be lower than buyers expect.
Dependents Can Affect Serviceability
The number of dependents in a household can also influence borrowing capacity.
Lenders account for the cost of supporting dependents when assessing how much income is available for loan repayments.
Final Thoughts
Borrowing capacity is influenced by several factors beyond income alone.
Understanding how lenders calculate borrowing power can help buyers make informed decisions when planning a property purchase.
Want to Know Your Real Borrowing Capacity?
At Echidna Equity, we help buyers understand how much they can realistically borrow and which lenders are best suited to their situation.
If you’d like to explore your borrowing options, feel free to get in touch.