If you’ve set your sights on buying a property, chances are you’re saving hard for that deposit – and perhaps spending more than a little time looking at listings online! But there’s another important thing to get your head around at this stage: your borrowing power. After all, the amount you’re able to borrow will have a big impact on the place you’ll be able to buy.
There are online calculators that can help you get a rough idea of how much you’ll be able to borrow – but if you’re keen to find out a bit more about how banks make these decisions, here’s some things you should know.
To put it simply, your borrowing power is determined by three key factors.
By making sure you’ve considered these three things, you can put yourself in a good position to not only get a loan, but to comfortably pay it off (which, let’s face it, is an important part).
As you may already know, the amount you earn will have an impact on the amount you can borrow. On top of that, the type of income you make may also come into play – for example, some lenders will factor in any overtime you get paid, while others won’t. For less regular types of income (things like bonuses or commissions) you may need to provide evidence of how much you’ve earned over the past two to three years. It’s a good idea to start putting together this record now, so you have the info ready by the time you apply.
Another good-to-know is that, if you plan to buy an investment property, your bank may include a proportion of your potential rent when assessing your income. It’s worth seeking some independent advice if you plan to go down this route.
Getting a loan is not just about the money you make – it’s also about the money you spend. When you apply, you’ll be asked about your financial commitments, which includes everything from your regular living expenses, to regular payments you make like car loan repayments. The point of this exercise is to make sure you can live comfortably while paying off the amount you’ve borrowed. After all, who wants to be forced to live on baked beans just to own a property – or even worse, to miscalculate what you can afford, and end up struggling to pay back your loan.
When estimating your living expenses in your loan application, be realistic. Also remember that your credit cards will be taken into account – and your bank will look at the credit limit you’re approved for, rather than what you actually owe. For this reason it can be worth reducing your limit if you don’t really need it.
How you’ll handle a rise in interest rates
The last thing a lender needs to be certain about is that you’ll be able to continue paying off your loan, even if interest rates go up. It will help if you can show you live within your means, and have demonstrated the ability to save regularly. If you have extra savings to fall back on, even better – and while you’re probably putting everything into your deposit right now, it’s a good idea to start building up a savings buffer on top of this. As well as giving the bank peace of mind, it’ll probably make you feel more confident too!