What determines how much I can borrow?

When you go to a broker or a bank, they ask you all these questions about everything. Why do they want to know how old your kids are? What does it matter what the limit on my credit card is, I don’t owe anything? Who cares how long I have been in this job for?

Let’s have a look at a number of things that lenders look at to determine your borrowing capacity. In other words: how much they are willing to lend you.

Are you in a relationship?

That’s another mouth to feed. Banks each have a certain amount what another adult is “costing” you. If your partner is working that’s important too.

Have you got kids?

Kids cost money. More kids, less money left for mortgage repayments. Banks are lending you less. On the plus side: family assistance and tax A and B are helping out. Which is why kids’ ages are of interest, because after the age of 11 the banks no longer take some of this tax into account because it will drop off soon.

More debt or credit cards?

If you have existing debt: those minimum payments are taking away from the money that’s left over to pay the mortgage, so you’ll get less. And credit cards: even if you don’t owe anything on them; you could go out tomorrow and spend every dollar available on them, so the bank looks at them as if you have. So, even if it’s only for the duration of your finance application, it might be a good idea or even necessary to close down those cards.

What sort of work do you have?

First, is it Full Time, Part Time or Casual or are you self employed? Full Time is the easiest; look at your payslips and we can tell what you make. Part Timers have a number of minimal hours they get at their job: those are the ones to look at. All the extra hours you might be doing; they count as overtime and the different lenders take different percentages of this overtime into account. Because your boss might decide from now on that you’ll only do your minimum hours. For the self employed ones among us: most banks want to see at least 2 years of Financials and Tax Returns. There is not enough security for them that you keep doing as well as you might be doing at one point. Some banks deal under certain circumstances with you after only one year working for yourself. So if you want to get into your own home and still have a job; get the finance sorted first before you start working for yourself. Finally; banks do look at certain professions differently: FIFO workers might find their overtime is taken into account 100%, truckers have advantages too. Speak with a broker to see what you qualify for.

If you happen to be casually employed; banks want to see that there is consistency in your job; they want to see you’ve been with that boss or in that industry for a longer period of time because they know; casual employees are easily let go.

Income

This one is such a basic one that I almost skipped it. The gross amount you (and your partner) make in a year is the starting point of everything else. If the banks take your income into account that is. When wouldn’t they take your income into account? If you recently started a business for instance. Or if you only just started a new job.

Savings

Savings actually don’t matter too much. You obviously need to have enough for the required deposit, but your borrowing capacity doesn’t change with more savings. If you have a lot of cash, what the bank lends you is still the same, you can just add your savings to the total. And here’s where many people have flawed thinking: they think; if I save longer I can get a bigger house. The amount many people can save is mostly quite insignificant if you compare it to what your borrowing capacity fluctuates with the interest. Which brings me to my next point:

Interest

The higher the interest rates, the lower the amount you can borrow, because your repayments will be higher. So on the flawed thinking regarding savings above: you might save up $20000 extra between now and next year. Since interest rates are currently very low (March 2016) - chances are that by next year interest rates would have risen and now your borrowing capacity has dropped by more than that $20000. And who knows what land prices and building cost would have risen by in that time.

Your Credit Score

It’s more of an all or nothing thing then that it determines how much you can borrow. The bank is either happy to lend you money based on your credit file or they’re not. They won’t say; hmmm, we’ll lend you $300000 but not $400000. You can read more about credit files here.

So you can see with all these factors influencing your borrowing capacity and different lenders looking at the same thing different, it’s a good idea to have a broker hold your situation to the different lenders’ criteria and find out what is best for you and which lender will give you the most! For a good start use the contact sheet and have us have a look for you!

#finance