Know your borrowing capacity?

Borrowing Capacity is the amount of money someone is eligible to borrow from a lender (based upon your income versus your outgoings).

This amount will vary from person to person and also lender to lender depending on your circumstances. We often find that Borrowing capacity, or lack of it, is what takes our clients by surprise in not being able to qualify for finance. It is something that most people don’t realise they need to preserve, particularly given the way banks assess loans (at a higher rate of outgoings than what you’d normally be paying).

How is it calculated?

We would calculate your Borrowing Capacity using the below formula, this is fairly standard and is similar to the calculation used by lenders:

Gross income – tax – existing commitments – new commitments – living expenses – buffer

 = monthly surplus

Lenders’ policies now generally add buffer margins to all loans instead of just the one you are applying for. Even if your living expenses are low, they are now adding buffers to those also.

Different lenders can have varying approaches to borrowing capacity, especially if there is anything unique about your situation (e.g. commission payments, self-employment). Here at Indigo Finance, we would ensure that we fully understand any particular circumstances that may affect your borrowing capacity. We have a deep knowledge of different lender policies and we can specifically guide you to which lenders will work best for your individual situation.

 Things that can affect your borrowing capacity:

  • Car Loans. These are a common one we see. This can dramatically hurt your Borrowing Capacity. If you are thinking of buying a car, decide your priorities – consider delaying your car loan until you have settled your loan. Then you can reassess your finances with your new loan repayments and see whether you would feel comfortable taking on the additional repayments.
  • Store Cards/Credit Cards – Lenders don’t just look at the outstanding balance of your credit cards and your minimum monthly repayments when assessing your loan application. In reality, they look at what your total repayments would be if you used the credit card limit in full even though it may not be utilised. The lenders’ rationale is that you have the ability to utilise the limit, so they must take this into account when determining your repayment serviceability.
  • Other debt (including, Afterpay/Zip Pay or personal loans). Not every 0% interest (or low interest) rate is what it seems.
  • Interest-free’ facilities – this often classes as a credit card. You may be given a bigger credit limit than you actually need.

 Need some advice on your borrowing capacity, and how best to achieve your goals? We’d love to hear from you!