Borrowing power for a mortgage in Australia depends on several factors, including your income, expenses, existing debts, credit score, and the lender's specific criteria. Here’s a breakdown of the key factors and steps to estimate your borrowing power.
Income: Gross income from employment Rental income from investment properties Other income sources (e.g., dividends, bonuses, government benefits)
Expenses: Living expenses (food, utilities, transport, etc.) Existing home loan repayments Other regular commitments (school fees, child support, etc.)
Existing Debts: Credit card balances and limits Personal loans Car loans Other liabilities
Credit Score: Your credit history and score influence the interest rates offered and the overall borrowing amount.
Deposit: The size of your deposit amount affects the loan-to-value ratio (LVR), which impacts borrowing power.
Loan Term: The length of the loan term (e.g. 30 years vs. 40 years) affects monthly repayments and borrowing capacity.
Interest Rates: The current interest rates and type of interest (fixed or variable) affect how much you can borrow. And the different buffer rate that banks apply will also affect the borrowing power.
Lender's Criteria: Different lenders have different criteria and policies, which can impact your borrowing power.
Steps to Estimate Borrowing Power:
Calculate Income: Sum up all sources of income.
Calculate Expenses: Estimate your total monthly expenses.
Assess Debts: List all your existing debts and their monthly repayments.
Determine Deposit: Calculate the amount you have for a deposit.
Use Online Calculators: Many Australian banks and financial institutions offer online borrowing power calculators. Enter your income, expenses, debts, and deposit to get an estimate.
In general, the overall debt to income ratio should be between 5-6. If your annual household income is $200k, then the overall borrowing power should between $1mil to 1.2mil.
To increase your mortgage borrowing power, you can take the following steps:
Increase Income
Get a Raise: If possible, seek a pay raise or look for a higher-paying job.
Earn Extra Income: Increase your total income through side jobs, part-time work, or investment income.
Rental Income: Rent out spare rooms or properties to generate additional rental income.
Reduce Expenses
Budget Management: Create and stick to a budget to reduce unnecessary expenses.
Cut Costs: Reduce discretionary spending on subscriptions, entertainment, and luxury items.
Reduce Existing Debt
Pay Off Debt: Prioritize paying off high-interest debt, such as credit cards and personal loans.
Consolidate Debt: Consider debt consolidation loans to lower overall interest rates and monthly payments.
Improve Credit Score
Pay on Time: Ensure all bills and loan repayments are paid on time.
Reduce Credit Card Debt: Keep low balances on credit cards.
Check Credit Report: Regularly check your credit report and correct any errors.
Increase Savings
Savings Plan: Set savings goals and follow through to increase your deposit for purchasing a home.
Gifts and Bonuses: Use gifts from family members or company bonuses to boost savings.
Adjust Loan Term
Extend Loan Term: Opt for a longer loan term (e.g., 30 years instead of 25 years), which reduces monthly repayments and increases borrowing capacity.
Choose Principal & interest repayment: Avoid interest only, as that will reduce borrowing power.
Increase Asset Value
Property Value Enhancement: If you own property, renovate or improve it to increase its value and net asset.
Investments: Invest in stocks, funds, etc., to increase your total asset value.
Consider a Co-Borrower
Joint Application: Apply jointly with a spouse or family member with stable income and good credit, increasing total income and borrowing capacity.
Choose the Right Loan Product
Compare Rates: Different lenders offer different interest rates and loan products; choose the one that best suits your needs.
Consult a Financial Advisor: Professional mortgage brokers can provide personalized advice to help you find the optimal loan solution.
By taking these steps, you may significantly improve your mortgage borrowing power to better meet your home buying needs. If you need more detailed guidance or assistance, please let us know.
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