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Before you borrow: here are some of the things you need to know about borrowing power

Borrowing. Power. These two words will have a massive influence on how you choose your first home. And getting to know the ins and outs of this important part of home loans – from savings to expenses, income to credit score, debts to assets, plus more – could help you tinker and improve it down the track. So let’s take a closer look at all the things that work together to decide your borrowing power.

First things first: borrowing what now?

Borrowing power is the maximum amount of money you can borrow from a lender (like us) based on your financial situation. While you might look at it as a question of whether it will help you get the home you want, the lender looks at it as a question of whether you’ll be able to pay back what you owe them (while handling life’s speed bumps along the way).

By the way, your borrowing power isn’t set in stone. There are things you could do that might improve it. So, once you feel like you’ve got a handle on the ins and outs, read an expert’s tips for boosting your borrowing power here.

The deposit difference

A hard-won deposit, built by savings upon savings, tells the lender that you’re a good saver – someone who’s able to put money away over a consistent period of time. How much you have for your deposit can change the game, too. The amount relative to the valuation of the property (known as the loan-to-value ratio) can influence the size of your loan, not to mention dictate whether you need to factor in additional things like lenders mortgage insurance or a friendly guarantor to help secure the loan.

Money coming in

Do we even need to say it? How much you earn will affect how much you can borrow. Income is one of the first things lenders look at when determining how much you can borrow, but it’s not the only thing. And income isn’t just your regular salary – it’s that, and more. For example, if you’re buying with your partner, both incomes will get considered. Types of income come into play too: things like overtime, bonuses and commissions all need to be proven. And if you plan on making your first home an investment, your bank may factor in your potential rent. No matter what income you receive, a lender will want to see a record, so start putting together that paper trail.

Savings habits

A whopping deposit will help with your loan-to-value ratio (LVR), but lenders want to see it all, including how you got there. Hopefully your savings history is in good shape, but if not, now’s a great time to start. Proof of regular savings (alongside other things like paying off bills regularly and on time) tells a lender that keeping up with a regular mortgage repayment won’t be too much for you to handle.

Money going out

Borrowing power is as much about the money you spend as the money you make. What kind of expenses does a lender look at? Well… everything! Your regular living expenses and any regular payments you make (like car loan payments, rent or even Netflix subscriptions), for a start. They will review your expense history and often ask for bank statements as proof. The name of the game for them is to make sure you can live comfortably while paying off the amount you’ve borrowed.

If you’re going through the early stages of discovering your borrowing power, say by using our ING borrowing power calculator, it’s important to be honest and realistic. Think hard about all your expenses, and don’t gloss over any, so you can get a more accurate estimate.

Debts to deal with

The role debt plays in borrowing power is two-fold: your repayments count towards your expenses (like the car loan payments we mentioned above), and the balance of the debt can be viewed as a liability. Debts can decrease the amount you can borrow, or even affect whether the bank says “Yes!” to your loan application at all. Keep in mind that if you have credit cards, it’s not just about what you owe. If you have a $20,000 credit limit on your credit card, a lender will treat it as if you have $20,000 owing on your card. Simply, if it can or does affect your ability to make repayments, a lender wants to know about it.

Your credit score

Your credit score acts as a record of your financial history and shows whether you have been paying any loans, credit cards and bills on time. It doesn’t directly affect borrowing power, but it does determine whether a lender will lend to you. A good history tells your lender that you’re reliable. You can check your credit score online for free within minutes, which could be worth doing before applying for a loan. It might help you identify any problems and give you a gentle push to start creating a disciplined history.

All about assets

The value of your assets factors into your borrowing power because these assets work as security if you hit one of life’s hurdles and are unable to make loan repayments. You might own your assets outright – like that car you paid off years back – or they might be financial, like your savings, share portfolios or other investments. They can all work together to determine your borrowing power. Assets also demonstrate your ability to put away money over time – lenders love to see that.

Last but not least: ch-ch-ch-changes

Things change. Incomes rise and fall. Interest rates can go up and down. Families grow (sometimes by surprise). New business ideas blossom. When life happens, a lender wants to know you have the ability to handle it. So they generally factor in a little buffer zone when they consider your borrowing power. Basically, they want to see you living within your means. It gives the bank peace of mind when they give you the loan – and it will help you feel good about the next steps too.

The building blocks of borrowing power

• Your deposit
• Your income
• Your expenses
• Any debts you have
• Any assets
• A buffer zone for life’s surprises