How is my borrowing capacity worked out?

Up until recently, it was relatively easy to apply for a home loan. As long as you could show that you have a stable job and manageable debt, then your application had a good chance of being approved. However, things have changed considerably over te past two years.

Despite interest rates remaining low, lenders have become increasingly strict when it comes to assessing borrowing capacity. Part of this is the Australian Prudential Regulation Authority’s (APRA) drive to tighten the amount of borrowing in the market, especially with relation to interest-only and investment loans.

So, what do lenders consider when reviewing your loan application?

  1. Your income.

Your income includes your base income derived from your primary occupation, any commissions, bonuses, business income, and other investments. Keep in mind that every lender has a slightly different policy when it comes to which types of income they will accept and how much of it they will include in their assessment.

  1. Your overall debt position.

Your potential lender will review all existing debts, which includes credit cards, personal loans, other mortgages, tax debts and any other ongoing financial commitment (including payment of child support).  Having a high credit limit on your credit cards could adversely affect your loan application as lenders use the limit (as opposed to the actual balance owing) to assess your monthly obligation.

  1. Your living expenses.

The industry regulator is increasing pressure on brokers and lenders alike to ensure that clients can afford the repayments associated with any new loan contract they enter into.  As part of this, lenders and brokers are required to make more extensive enquiries into living expenses than they have had to in the past.  Your typical expenses may include phone bills, food shopping, utility bills, education, car expenses and even your entertainment spending habits.

Using a Mortgage Broker

With the tighter restrictions on borrowers, it can be confusing and time-consuming for borrowers to determine their borrowing capacity. This is where we come in. Before we recommend a lender to you, we will figure out what your needs are as well as your current financial situation and how those circumstances fit into the different policies of various lenders. This streamlines the process considerably and ensures that you’re matched to lenders that can assist you and offer products that truly match your situation. Doing so takes away the frustration of getting turned down and can save you considerable time and money.