When you apply for a home loan, banks and lenders<\/a> assess you on a host of different criteria to determine how much they\u2019re prepared to let you borrow.<\/strong><\/p>\n But which factors and information do they use in deciding the final figure?<\/p>\n Here\u2019s a sneak peek at the analysis that lenders do when calculating your borrowing power.<\/p>\n Banks and lenders crunch the numbers based on a higher interest rate than the advertised figure. Picture: Getty<\/p>\n<\/div>\n Forget about running calculations based on current interest rates when trying to gauge your own borrowing power.<\/p>\n When banks and lenders crunch the numbers, they do so on a significantly higher interest rate to ensure you can still afford the repayments if interest rates climb.<\/p>\n What\u2019s the outlook for interest rates?<\/strong><\/em><\/p>\n uno Home Loans<\/a> founder and CEO Vincent Turner says many lenders will use a hypothetical interest rate that is as much as double the actual rate.<\/p>\n \u201cThey don\u2019t do the calculations based on current interest rates, which are about 4%. Depending on the bank, they actually do it on about 7% or 8%,\u201d Turner says.<\/p>\n \u201cThat\u2019s a trap a lot of people fall into, because they do the maths in their head and say, \u2018OK, if I need to borrow $700,000, what\u2019s 4% a year on that?\u2019 And feel they can easily afford that. But lenders compute it on almost double that amount, so if interest rates did go up, they feel confident you could still service the loan.\u201d<\/p>\n Having money behind you is critical if you wish to increase the amount that banks will let you borrow.<\/p>\n Turner says a bigger deposit can be just as determinative as a huge salary.<\/p>\n \u201cEven if you have a really, really high income and an impeccable credit score, if you don\u2019t have much of a deposit, that\u2019s going to limit you,\u201d he says.<\/p>\n That said, a higher income will weigh in your favour when it comes to determining the maximum amount you can borrow. But it\u2019s important to note that varying standards are applied to different types of income.<\/p>\n For example, Turner says, people who are self-employed will have a more difficult time having income recognised compared to someone who earns the same amount as an employee.<\/p>\n Self-employed workers will have a more difficult time having income recognised, compared to employees on the same amount. Picture: Getty<\/p>\n<\/div>\n \u201cThe other thing to keep in mind is that contracting or casual basis income is often penalised,\u201d he says.<\/p>\n \u201cSo even if you\u2019re a contract worker and you\u2019re making $80,000 a year, most lenders will see that as not as strong as a permanently employed full-time worker making $80,000 a year.\u201d<\/p>\n Just because you haven\u2019t racked up any debt on your credit cards, it doesn\u2019t mean they won\u2019t significantly impact your borrowing power.<\/p>\n Turner advises that lenders will be cautious and assume that you may spend up to your cards\u2019 limits at any moment.<\/p>\n \u201cIf you\u2019ve got a $20,000 credit card limit, lenders will view that the same way as if you had a $20,000 credit card debt, because it\u2019s basically a liability that you already have, and you could spend up to that amount of money,\u201d he says.<\/p>\n Learn more about credit cards and borrowing power:<\/strong><\/em><\/p>\n Turner says banks and lenders are looking harder than ever at borrowers\u2019 expenses.<\/p>\n \u201cWhen you hear the horror stories of dodgy brokers being fraudulent in home loan applications on behalf of their client, it\u2019s often because they\u2019re understating their expenses,\u201d he says.<\/p>\n \u201cWe always say to people, really take the time to genuinely look at what your real expenses are, because you want to enter into a home loan that ultimately helps to put you in a better financial position \u2013 not a stressful one.\u201d<\/p>\n To work out how much you could borrow for a home loan, use a home loan borrowing power calculator.<\/p>\n
\n <\/p><\/div>\n Realestate au <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Can you service a higher interest rate?<\/h2>\n
![\"lending](\"https:\/\/i0.wp.com\/www.realestate.com.au\/blog\/wp-content\/uploads\/2017\/10\/06144750\/lending-borrowing-power_2000x1500.jpg?resize=2000%2C1501&ssl=1\")
<\/p>\nThe size of your deposit<\/h2>\n
All income is not created equal<\/h2>\n
![\"office](\"https:\/\/i0.wp.com\/www.realestate.com.au\/blog\/wp-content\/uploads\/2017\/10\/06144758\/office-work_2000x1500.jpg?resize=2000%2C1499&ssl=1\")
<\/p>\nCredit cards<\/h2>\n
Expenses a major factor<\/h2>\n
What to do next<\/h2>\n