Borrowing power or Borrowing capacity means the estimated amount that you may be able to borrow from the bank or a lender as a loan. Either you are buying your first home, investment property, vehicles or commercial property knowing how much you can borrow will put you in a good position when it comes to buy or make an offer.

When you are in a market to buy, it is easy to get carried away with the fun of buying. However, before you get carried away, it’s important to check off the essentials first. Although organising your finances may seem drab in comparison to perusing sales listings, gaining pre-approval with a lender will give you confidence about how much you can afford to borrow.

Borrowing power is generally calculated as Net income (income after tax) minus your expenses (expenses to consider are everyday expenses including bills, utilities and financial commitments). The surplus must be enough to cover the minimum monthly repayment on the new borrowings.

How Lenders work out borrowing power?

For banks and lenders to accurately work out borrowing power they require borrowers to provide list of financial documents and information, examples are;

• Payslips for PAYG borrowers
• Tax returns for Self-employed borrowers
• Number of dependents
• Detailed Expenses
• Number of applicants
• Loan/debts and monthly repayment amount
• Credit cards limits and balance.
• HECS or any other study loans
• Any tax debts

There are also other factors that may influence borrowing such as interest rates, credit scores. Lenders are also obligated to calculate repayment on borrowing on extra 3% higher than their contractual rate. E.g., if your home loan interest rate is 5.50%, Banks normally work out the repayment on 8.50% (5.50% + 3% buffer) so that they can afford repayments with up to 3% rate increase.

How to increase borrowing Power?

Different lenders have different policies so borrowers may be able to borrow higher amount with certain lenders. Some ways borrowers can increase borrowing capacity are.

• Increase of income
• Reducing debt
• Reducing spending habit and expenses
• Lowering credit card limits
• Choosing lender that suits needs.

Here at Draw Equity we have access over 30 lenders where we can compare borrowing and find out the one that meets your needs. If you would like to find out what is your borrowing power simply fill this form out and we will get in touch with you.