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Maximum Borrowing Capacity
HOW MUCH CAN I BORROW?
Most of the time, the amount you need to borrow has been worked out well before beginning your property search. As people get closer to purchase, many things conspire to influence what they eventually borrow. (Not at least of all many of us end up purchasing properties at prices greater than we initially intended!)
HOW DO LENDERS ASSESS YOU?
Lenders take into account the maximum cost of the property (including purchase costs if these are to be included in the loan), the size of your deposit and the loan repayments at current interest rates (some lenders use a higher "stress" rate which factors for potential rate rises). They will typically review all your income sources and expenditure, add a margin for safety, and then calculate your uncommitted monthly income. The most important factor to a lender is your level of uncommitted monthly income. The greater it is, the larger your borrowing capacity overall.
Factors that can impact your borrowing capacity include:
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Loan value Ratio
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Income and types of income, e.g. casual vs. full-time
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Other loans
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Credit Card limits
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Loans terms
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Number of dependents and their situation
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Loan products
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Tax rates
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Rental income
Lenders calculate maximum borrowing capacity differently
When it comes to the cold, hard facts of how much you can borrow, it might surprise you to know that lenders calculate your borrowing capacity differently, so it can pay to consult a mortgage broker.
Examples of different lender results for the same scenario
To help you understand the extent to which lenders will differ in both your maximum borrowing capacity and the interest rate or deal you may be offered.
Borrowing Capacity Schedule
If you are the kind of person who needs a "general rule" as a guide, you could safely assume that most major lenders will draw the line at allowing you to borrow 40% of your gross income going towards your loan repayments. If two people are applying for a loan, then incomes are added together and treated as one amount, although outgoings are treated separately. The size of your family will of course also impact your assumed outgoings. The schedule above gives you some idea of what you would typically be able to borrow. While you can't present these numbers "to the bank" as evidence to support your application, they are a useful guide.
Get pre-approved first
Home loan pre-approval is something you should definitely get if you have the time. Most lenders offer it and it is usually valid for three months. As you would expect, it is subject to the conditions under which it is approved, but it does give you a very clear framework within which to work.