How much you can borrow depends on two factors:
- Your income including your liabilities – your borrowing capacity
- Your deposit in terms of purchase price
If for example, you can borrow up to $700,000 but you only have a deposit of $30,000, even 5% comes to $35,000 and the amount of deposit will not be sufficient.
In this case, you have to work on how much you can afford based on your deposit.
How do lenders calculate your borrowing capacity?
Your income is the most important factor when it comes to borrowing capacity.
Lenders see how much you earn and what other commitments you have. Even if you have credit cards that you don’t use regularly, they will consider it when accounting for your debts. This is because you always have the capacity to go out and spend the balance on your credit card.
Your borrowing capacity is based on an assessment rate – not the actual rate.
All lenders will assess your application at 1.5% to 2% higher margin than the actual interest rate they are offering you. This is called the assessment rate. You may ask why they need to do it that way and when it in turn lowers your borrowing capacity, you may feel it is not right.
For example, if you want to borrow $400,000 and the interest rate offered to you is 5%, the assessment rate can be anywhere between 6.5% to 7%. Some banks will reduce their assessment rate by the professional package discount offered.
Interest rates will not always stay low. There is every chance that it can go up. If your interest rate actually goes up within a year or two after your loan is approved and you cannot afford the loan, the lender doesn’t want to be behind you for missed repayments. Hence they assess all applications at a higher percentage.
Many lenders will approve your application even if you don’t have too much surplus fund after they calculate your borrowing capacity including living expense and other commitments. This indicates that you are stretching your budget and it is usually not wise to borrow to your highest level of affordability.
Some other lenders will want you to have a certain amount of spare money before they will approve your loan. This is so that you can factor in some unknown expenses.
Use our how much can I borrow calculator for an assessment.