Sam: Where purchasing, looking to refinance to a better rate, or release equity from your
home, one of the first steps you need to find out is your borrowing power or how much a
bank is willing to lend you.
In this video we're going to help you understand what is your borrowing power, what impacts
it and how it's calculated.
And then we'll provide you with four tips of how to improve it.
Sam: Hey guys, it's Sam.
Here at Lendi we've helped thousands of Australians calculate their borrowing power and get into
their dream property.
By the end of this video, you should have a better understanding of what you might be
able to borrow and how you can increase this.
Now, before we start, if you're interested in getting great home loan tips in Australia,
make sure you subscribe to our channel and hit the bell so you can get notified when
we post new videos.
Sam: So what is borrowing power?
Your borrowing power is essentially the amount of funds that a lender is willing to lend
you.
So how is borrowing power calculated?
Although the exact criteria will differ from lender to lender, your borrowing power will
be calculated based on the following.
Your income is the most important factor when calculating your borrowing power.
Your current and future income situation indicates to the lender how are you going to be able
to meet the ongoing nature of the repayments.
Income can be derived from multiple sources such as employment, rental income, dividends
or other investments.
Whatever income is being used, the lender will want to confirm the ongoing and sustainable
nature of the income source.
Your asset and liability position as well as ongoing and other living expenses.
Sam: A strong financial position shows your ability to handle money and expenses.
If you own enough assets, or have sufficient equity in your property, you will be able
to use this equity as collateral and can also increase your borrowing power.
If you have little to no existing debt and a high asset position, you're more likely
to have a much higher borrowing power than someone with much more debt and a lower asset
position.
Sam: For example, even if you have a credit card with a $0 balance that you pay off each
month, with a high limit, the lender will still use the limit in order to calculate
your borrowing power.
Sam: Expenses are broken down into both discretionary and nondiscretionary expenses.
Discretionary expenses are expenses that can be changed such as eating out at nice restaurants
and lifestyle expenses.
Nondiscretionary expenses are the mandatory expenses that need to be paid back each month.
For example, a non discretionary expense can be something like insurance or childcare or
even groceries.
Something that must be ongoing and paid back each month.
If your lifestyle expenses are high, this could also impact your ability to borrow and
in some circumstances you may even need to justify some non-discretionary living expenses
and the ongoing nature of these outgoings.
Sam: Lastly, your credit history will also impact your borrowing power significantly.
If you want to get an estimate of how much you can borrow, use the link in our description
for our free borrowing power calculator.
Sam: So what can you do to help increase your borrowing power?
The best way to increase your borrowing power and chances of credit approval are to indicate
to the lender that you're financially sound and can meet your loan repayments.
A simple way is to get rid of unnecessary debt and credit cards.
How much debt you currently have will influence your borrowing power to a great extent.
Having unnecessary debt such as credit cards that you don't even use could significantly
deter a lender from the amount they're willing to lend you.
Another way is to reduce your expenses.
Lenders want to know that you can comfortably meet your repayments and if they sense you
might be living week to week and could be at risk of mortgage stress this can significantly
affect your borrowing power.
Sam: It's smart to regularly review your expenses and see if you can cut back on any non discretionary
expenses such as the gym membership you never use.
The next one is increasing your savings.
Having a good savings history indicates to the lender that you are financially sound
and if your circumstances do change in the future, you have a much higher chance of being
able to meet the ongoing nature of the repayments.
At the same time, the larger the deposit equals the less amount you'll need to borrow.
Sam: Lastly, you want to be aware of and try and improve your credit score.
Your credit report is a reflection of your credit history and includes things such as
all inquiries you've had for any credit as well as any hardships such as defaults.
Having an adverse credit history or a bad credit score can significantly reduce your
borrowing power as it indicates to the lender that there's a much higher risk of default
on the loan.
Sam: If you want to learn more about credit scores, watch Lendi's video on our YouTube
channel.
That's it guys, everything you need to know about borrowing power and the four tips you
can use to help increase yours.
If you're looking for more great tips, you can also join our private Facebook group at
Home Loan Hacks Australia where we talk all things home loans.
The link to the group is in the description.
Finally, if you found this video helpful, please make sure to give us a thumbs up and
ask any questions in the comment section below.
If you're looking for more information on other relevant home loan topics, you can check
out our videos here or here.
See you next time.