Purchasing a home can be a stressful task, especially when considering the question, how much home loan can I borrow?
If you are looking to buy a home and want to know how much you can borrow from a mortgage lender, this article is for you. In this blog, we will cover how to calculate your home loan borrowing power, factors that affect your borrowing power, how to improve your borrowing power, and the next steps you can take.
How to Calculate Your Borrowing Power
The easiest way to estimate your borrowing power is to use a borrowing power calculator. You simply enter into the calculator how much you can afford to borrow each month and add an interest rate and term. The home loan calculator will output the value of a home you can purchase within a range.
Another way to determine your borrowing power calculation is to use the 30% rule or 50% rule. Many lenders recommend using the 30% rule to determine your borrowing capacity which states your mortgage payments should not exceed 30% of your gross income.
30% rule example: if you make $10,000 per month, the 30% rule suggests only using up to $3,000 per month towards your home loan payments.
Some mortgage experts recommend using the 50% rule instead of the 30% rule. The 50% rule recommends using up to 50% of your income.
50% rule example: if you earn $10,000 per month, using the 50% rule would allow $5,000 per month to be used for home loan payments.
Factors That Affect Your Borrowing Power
To better answer the question, of how much home loan can I borrow, it is important to understand the factors affecting a borrower. Mortgage lenders look at many factors when determining the borrowing power of a home buyer, some of which include the following:
- Income: Income is the most important factor when considering a home buyer’s borrowing capacity. A person with a higher income tends to have more borrowing power as they typically have more money to use on a home loan.
- Expenses: Mortgage lenders will consider your expenses, such as your bills, groceries, transport costs, and other regular expenses. By doing so, lenders can understand how much money you have after paying for your living costs. A lender will typically favour a borrower with fewer expenses as they can contribute more to their loan.
- Assets: The assets that you own such as any property, savings account, and investments, may be considered when determining your borrowing power. A person with a high value of assets would be looked upon as more favourable as they are less likely to default on their loans.
- Debt: Debt such as credit cards, car loans, and other loans is another consideration lenders use when calculating borrowing power. High debt is generally considered bad as it means borrowers will have less money to pay off their home loans.
How can you improve your borrowing power?
Alongside improving areas of income, expenses, assets, and debts, borrowers can focus on the following areas to increase their borrowing power:
- Improve credit score: Having a good credit score indicates to lenders that you are a reliable borrower. Some simple ways to improve your credit score include paying your bills on time, using a low proportion of your available credit, and fixing errors on your credit report.
- Save for a larger deposit: A larger deposit will increase your borrowing power. Lenders typically require a minimum deposit of 20% of the purchase price of the home. Without a 20% deposit, you may be required to pay Lenders Mortgage Insurance.
If you are a first-home buyer, you may be eligible for government grants such as the first-home guarantee to lower the minimum deposit to as low as 5%.
- Choose a loan type that suits you: If you are purchasing an investment property, selecting an interest-only loan may be a good option. Interest-only loans mean lower monthly payments, increasing your borrowing capacity.
- Shop around for a competitive loan: Don’t settle for a lender, shopping around for the right mortgage lender and mortgage product can save you thousands of dollars on your home loan.
One Click Life is a mortgage broker that can help you find the right mortgage lender and products across Australia. It is important to speak to a mortgage broker if you’re unsure of your borrowing capacity.
What are the next steps?
Once you have an idea of how much you can borrow, it’s a good idea to get a pre-approval letter from a mortgage lender. A pre-approval letter will show sellers that you’re serious about buying a home and that you’ve been pre-approved for a loan. This can give you an advantage in a competitive housing market. After obtaining pre-approval, you can begin your journey of house shopping. If you are looking to answer the question, how much home loan can I borrow, the short answer is to use a borrowing power calculator. By considering the factors that affect borrowing power and using an online borrowing calculator, you will have a better understanding of your borrowing capacity. Taking time to improve your borrowing power will put you in a better position to obtain pre-approval and start your journey of purchasing a home.
One Click Life: your one-stop shop mortgage broker!
If you are in the market for a mortgage, One Click Life can help you choose the mortgage lender that best suits your needs so you can save more on your home loan. One Click Life can also take care of your Will, Health Insurance, and Taxes.Y ou can claim your tax agent fees back on your online tax return, so why not minimise the tax you pay while maximising your tax return?