Borrowing capacity and the loan amount you qualify for

What's my Borrowing Capacity?

When embarking on the journey of homeownership or property investment, one of the fundamental aspects to consider is your borrowing capacity. Simply put, borrowing capacity refers to the maximum amount of money a lender is willing to loan you based on your financial circumstances. Understanding your borrowing capacity is crucial as it determines the size of the loan you can secure, which in turn influences your property purchasing power. In this article, we delve into what borrowing capacity entails, how it is calculated, and the factors that influence it.

What is Borrowing Capacity?

Borrowing capacity is essentially a measure of your ability to repay a loan, taking into account various financial factors such as income, expenses, assets, and liabilities. Lenders assess your borrowing capacity to determine the level of risk associated with lending you money. The higher your borrowing capacity, the greater the loan amount you can qualify for.

How is Borrowing Capacity Calculated?

Borrowing capacity is calculated using a combination of financial information provided by the borrower and lending criteria set by the lender. While the specific methodology may vary between lenders, the following are key factors commonly taken into consideration:

1. Income: Your gross income, including wages, salaries, bonuses, commissions, and rental income, is a primary determinant of your borrowing capacity. Lenders typically assess your income stability, employment history, and prospects for future earnings.
2. Expenses: Your living expenses, debt repayments, and financial commitments are deducted from your income to determine your disposable income available for loan repayments. This includes expenses such as rent, utilities, groceries, insurance premiums, credit card repayments, and other loans.
3. Assets: Assets such as savings, investments, properties, and vehicles contribute positively to your borrowing capacity. Lenders may consider the value and liquidity of your assets when assessing your financial position.
4. Liabilities: Existing debts and financial obligations, including mortgages, personal loans, credit card balances, and outstanding bills, are subtracted from your assets to calculate your net worth and borrowing capacity.
5. Credit History: Your credit history and credit score play a crucial role in determining your borrowing capacity. Lenders review your credit report to assess your creditworthiness and repayment behaviour.

Factors Influencing Borrowing Capacity

Several factors can influence your borrowing capacity, including:

• Interest Rates: Fluctuations in interest rates can impact your borrowing capacity by affecting the affordability of loan repayments.
• Loan Term: The duration of the loan term can influence your borrowing capacity, with longer loan terms resulting in lower monthly repayments but potentially higher overall interest costs.
• Loan Type: Different types of loans, such as variable rate loans, fixed-rate loans, and interest-only loans, have varying repayment structures that can affect borrowing capacity.
• Economic Conditions: Macroeconomic factors such as employment rates, inflation, and housing market trends can influence lending policies and borrowing capacity.

Mortgage Hub: Our Preferred Mortgage Partner

For a detailed understanding of your borrowing capacity and personalised mortgage solutions, consider consulting a trusted mortgage broker like Aron from Mortgage Hub. Their website provides valuable insights into borrowing capacity calculation and factors affecting loan eligibility. By leveraging their expertise and industry knowledge, you can navigate the mortgage process with confidence and make informed decisions regarding your property financing needs.

Borrowing capacity is a critical component of the mortgage lending process, determining the amount of funding you can access for property purchase or investment. By understanding how borrowing capacity is calculated and the factors that influence it, you can better position yourself to secure favourable loan terms and achieve your financial goals.
Connect with Mortgage Hub to explore your borrowing capacity and embark on your property ownership journey with clarity and confidence.