Understanding how banks calculate your borrowing power is crucial when you're planning to apply for a home loan. Whether you're a first-time buyer or looking to refinance, knowing these factors can help you better prepare for your loan application.
What is Borrowing Power?
Borrowing power, also known as borrowing capacity, is the maximum amount a bank or lender will allow you to borrow based on your financial situation. This calculation helps lenders ensure you can comfortably repay your loan while maintaining a reasonable standard of living.
Key Factors That Influence Your Borrowing Power
- Income
- Regular salary or wages
- Overtime and bonuses
- Rental income
- Investment returns
- Government benefits
- Expenses
- Living expenses
- Existing loan repayments
- Credit card limits
- Buy now, pay later commitments
- Insurance payments
How Banks Assess Your Income
Banks typically look at your net income (after tax) and apply different assessment rates to various income sources:
- Base salary: Usually assessed at 100%
- Overtime: Often assessed at 50-80%
- Bonuses: Usually assessed at 50-70%
- Rental income: Typically assessed at 70-80%
Living Expenses Assessment
Banks use either the Higher Education Monitor (HEM) benchmark or your declared living expenses, whichever is higher. They'll examine your:
- Groceries and food
- Transport costs
- Utilities
- Entertainment
- Education expenses
- Insurance payments
- Medical costs
Debt Serviceability
Banks apply a serviceability buffer to ensure you can manage repayments if interest rates increase. Currently, Australian banks typically add a 3% buffer to the actual interest rate when calculating serviceability.
The Assessment Rate Formula
While each bank has its unique formula, the basic calculation typically follows this pattern:
- Calculate total monthly income
- Subtract tax and existing commitments
- Apply living expenses benchmark
- Apply serviceability buffer
- Calculate maximum loan amount
Factors That Can Reduce Your Borrowing Power
- High credit card limits (even if unused)
- Personal loans and car loans
- Buy now, pay later services
- Dependent children
- Poor credit history
How to Maximise Your Borrowing Power
- Reduce or cancel credit cards
- Pay off existing debts
- Close unused accounts
- Save for a larger deposit
- Reduce discretionary spending
- Consider additional income sources
The Impact of Interest Rates
Interest rates significantly affect borrowing power. When rates increase:
- Your borrowing capacity decreases
- Monthly repayments increase
- Serviceability calculations become stricter
Different Lenders, Different Calculations
It's important to note that each lender has their own method of calculating borrowing power. Some factors that vary between lenders include:
- Treatment of overtime and bonuses
- Assessment of rental income
- Living expenses benchmarks
- Treatment of other income sources
Why Work with a Mortgage Broker?
A mortgage broker can help you:
- Understand your borrowing power across different lenders
- Identify lenders most likely to approve your loan
- Structure your application for maximum borrowing capacity
- Navigate complex lending criteria
- Access better interest rates
Final Tips
- Keep good financial records
- Maintain a stable employment history
- Save consistently
- Reduce unnecessary expenses
- Seek professional advice
Understanding how banks calculate your borrowing power puts you in a better position to secure your home loan. At Nurse Loans, we specialise in helping healthcare professionals navigate the home loan process and maximise their borrowing capacity. Contact us today to learn how we can help you achieve your property goals.
