Calculating Changes To Your Borrowing Power

Ever wondered how small changes to your financial situation impacts your borrowing power?

Borrowing power calculations by Aussie banks are done in the same way. They run a budget on you. They add your net income, subtract your assessed expenses and whatever you have left over every month is available for mortgage payments. Most banks stress test the 'interest rate' on the mortgage repayment by 3%.Therefore, anything that changes your 'income' or 'assessed expenses' changes your borrowing power.

1. Credit card limits: Increasing your limit by $10,000, will reduce your borrowing power by ~$50,000. Credit limits are used in bank calculations, regardless of whether you actually pay any credit card interest or not.
2. HELP (Student) debts: HELP debt repayments are tied to your income, not the debt amount owed. For median incomes, this reduces your borrowing power by ~$65,000. A table of impacts for different income bands is in the video.
3. Salary/Business: A $10,000 pay rise will increase your borrowing power by ~$75,000. The impact of this will fall for higher income earners, as they will pay a higher marginal tax rate. Note salary income itself, generates a 5x return. The initial salary you earn goes towards funding your life, and can't be leveraged. In some cases, the impact is much lower if the higher income pushes you into a higher expense band.
4. Rental Income: For the average income earner, a $10,000 increase in rental income will increase your borrowing power by ~$50,000. Rental income is shaded, so its a smaller impact than salary rises.
5. Living expenses: Increasing your expenses by $10,000 p.a. above bank minimum expenses will decrease your borrowing power by ~$120,000. Expenses are paid out of net income, it has more of an effect than gross salary increases.
6. Interest only: Interest only loans are assessed over 25 years, not 30 years. On a $500,000 loan, this will reduce your borrowing power by ~$35,000.
7. Car Leases vs Car Loans: A novated car lease for a $20,000 vehicle that includes all running expenses instead of a car loan will reduce your servicing by ~$40,000. Novated leases include car expenses in your monthly repayment, eroding your borrowing power more than traditional car financing options.
8. Babies: Having a baby reduces your borrowing power by around ~$50k.

The above calculations are for your OWNER OCCUPIER borrowing power. The impacts are higher for INVESTMENT calculations. When you borrow more, you buy for a higher value, typically earning more rental income, and creating a higher borrowing multiple.